Case 028Private credit and direct lendingWarm up
A warehousing borrower has Rs 60 crore of cash available for debt service and pays Rs 45 crore a year. The lender's floor is 1.25x DSCR. How much more can it borrow on a 7 year amortising loan at 10%?
1The situation
Hiranmay Warehousing owns six logistics parks leased to e-commerce and auto parts tenants. After operating costs, tax and maintenance capex it generates Rs 60 crore a year of cash available for debt service. Its existing loans cost Rs 45 crore a year in interest and scheduled principal, so its debt service coverage ratio is 1.33x.
It wants to borrow more to build a seventh park. Its lender will go no lower than 1.25x. New money would be a 7 year loan at 10%, repaid in equal yearly instalments. Treat the Rs 60 crore as flat; the new park earns nothing until it is built.
2Your task
How much extra debt can Hiranmay take on, and why does the answer depend on the shape of the loan?
Quick check
Rs 3 crore a year of spare debt service. Roughly how much 7 year amortising debt at 10% does that carry?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 15 crore. At 1.25x the most Hiranmay can pay is Rs 48 crore a year, Rs 3 crore more than today. A 7 year loan at 10% with equal instalments carries Rs 4.87 of debt per rupee of yearly payment, so Rs 3 crore supports Rs 14.6 crore. The same Rs 3 crore would carry Rs 30 crore of interest only debt; the amortisation, not the rate, sets the answer.
Step 1What does DSCR measure, and why do lenders size on it?
A bank deciding your home loan does not ask how big the house is; it asks whether your monthly salary covers the EMI with room to spare. DSCRDebt service coverage ratio: cash available for debt service divided by the interest and principal due in the year. Below 1.0x the borrower cannot pay from operations. is the business version of that check: cash available for debt service over the interest and principal due in the year. Hiranmay earns Rs 60 crore and pays Rs 45 crore, 1.33x, so a 25% fall in cash would still just cover the payments. The lender's floor of 1.25x is its cushion: it will lend up to the point where cash is a quarter more than the payments and no further.
Step 2How much extra debt does the floor allow?
Work it from the floor backwards. At 1.25x, the most debt service Rs 60 crore can carry is 60 over 1.25, Rs 48 crore, and today's service is Rs 45 crore, so Rs 3 crore a year is spare. The question is how much loan Rs 3 crore a year buys, and that depends on how the loan is repaid. An interest only loan at 10% needs only interest from the Rs 3 crore: Rs 30 crore of debt. A loan that must repay itself in 7 years needs the same Rs 3 crore to cover interest and principal together, and the amount it supports is the present value of 7 payments of Rs 3 crore at 10%.
| 3 | spare yearly debt service at the 1.25x floor, Rs crore |
| 4.868 | present value of Rs 1 a year for 7 years at 10%, the annuity factor |
| 14.6 | the loan those payments can repay, Rs crore |
Step 3Why is this different from sizing debt on leverage?
A buyout lender says 4x EBITDA and mostly means bullet debt with a cash sweep: the test is whether interest is covered and whether the company can refinance at exit. A project or real estate lender sizes on DSCR because the loan must repay itself out of the asset's cash, so the amortisation schedule is the constraint, and a longer tenor at the same coverage supports more debt. Stretching Hiranmay's loan to 10 years lifts the capacity from Rs 15 crore to Rs 18 crore on the same Rs 3 crore; shortening it to 5 years cuts it to Rs 11 crore. That is why the term sheet negotiation on a warehouse loan is about tenor and amortisation profile as much as rate.
| Loan shape at 10% | Rs 1 of yearly service carries | Rs 3 crore carries |
|---|---|---|
| 5 year equal instalments | 3.79 | 11.4 |
| 7 year equal instalments | 4.87 | 14.6 |
| 10 year equal instalments | 6.14 | 18.4 |
| Interest only | 10.00 | 30.0 |
Two refinements to say before the interviewer asks. The existing Rs 45 crore of service includes principal, so as those loans amortise the coverage improves every year and more capacity appears; a careful answer sizes on the minimum DSCR across the life of both loans, not just year 1. And Rs 15 crore will not build a logistics park: the gap is equity, or a construction loan that is sized on the new park's own lease income once signed, which this case told you to ignore.
Where candidates lose it
The usual loss is dividing Rs 3 crore by 10% and answering Rs 30 crore. That treats an amortising loan as a bullet; the principal has to come out of the same Rs 3 crore, which halves the answer.
The second miss is reading 1.25x as a target rather than a floor. The lender lends up to it, and a borrower that sits exactly on the floor has no room for a bad year.
What the interviewer asks next
- The new park will add Rs 12 crore of cash once leased. How would a lender let Hiranmay borrow against that today?
- Rates rise to 12%. What happens to the capacity on the 7 year loan?
- Why might a lender prefer a sculpted repayment profile to equal instalments for a warehousing business?
Asked at Oaktree Capital Management, Generalist, Los Angeles, 2025 (Wall Street Oasis): Tell me about how DSCR affects the attractiveness of a borrower
Company names and figures are illustrative.