Debt Service Reserve Account (DSRA)

What is the Debt Service Reserve Account (DSRA)?

The Debt Service Reserve Account (DSRA), which is a component of a debt service fund, is a reserve account used to pay interest and principal amounts of debt. The DSRA is very important when the cash flow available for debt services (CFADS) is below the necessary amount to make the payments.

In the case of a credit agreement, the lender will more than likely impose a clause that requires a DSRA, with a balance that must be periodically restored to a minimum amount. The minimum amount is often contingent on the amount of interest and principal remaining.

Purpose of the Debt Service Reserve Account

The Debt Service Reserve Account acts as a safety measure to ensure that the necessary payments to lenders can be met. It is an important part of project financing and is commonly used to ensure the borrower gets the flexibility to resolve problems or restructure their debt during times where the debt service coverage ratio is below 1. The DSRA can be very important to lenders who are worried about borrowers defaulting on payments.

Importance of a Debt Service Reserve Account in Project Finance

The Debt Service Reserve Account commonly exists in project finance. It is especially true for non-recourse project financing, where the lender is only entitled to repayments of profits from the funded project. The DSRA is often created once the loan becomes repayable, such as after the construction of a project.

If the project’s cash flows available for debt servicing are not enough to meet the debt obligations, the debt service reserve account is credited. Often, within the credit agreement, the debt service account is required by the borrower for the benefit of the agent.

How to Calculate the DSRA Amount

The DSRA target balance can be decided in a number of ways and takes both the interest payments and principal payment into account. In general, the DSRA must meet a required minimum balance and will be restored according to terms in the credit agreement.

The funding method can be set as periodic intervals dependent on the debt servicing time span, or it can be a fixed amount on a set date. You can generally find the funding method stated in the project term sheet.

Examples of different clauses within a credit agreement pertaining to the DSRA follows:

• “Following the conversion date, on the first fiscal quarter end, the borrower shall deposit an amount no less than one-fifth of the principal and interest due into the debt service reserve account. From time to time afterward, additional or lesser amounts shall be deposited to account for changes in the amount due.”
• “On the closing date, the borrower shall deposit an amount equal to five million dollars into the debt service reserve account.”
• “Within six months of the end of each fiscal year, the various subaccounts within the debt service reserve account must be restored to at least the required amount.”
• “In the debt service fund, there will be maintained the debt service payment account and the debt service reserve account. In the occurrence of an event of default, money in the debt service reserve account may be transferred to the debt service payment account to be used to pay debt service charges with respect to the debt obligations.”
• “If a debt service charge falls due, and the subaccount within the debt service payment account is insufficient to meet the debt service charge, the trustee will transfer an amount sufficient to make up the deficiency. It will be from the appropriate subaccount within the debt service reserve account.”

Note: The example clauses above are only for educational purposes and should not be used for any other purpose.

How to Account for the DSRA in a Financial Model

The DSRA and funding method are important to consider when creating a financial model for a project. The funding of the DSRA, as well as the use of this reserve account, will affect cash inflows and outflows.

Building out a debt and reserve schedule can be very useful in determining how the DSRA will affect the cash flows of a project. Following is an example of a debt and reserve schedule:

If you would like to learn more about financial modeling, check out CFI’s Financial Modeling Courses.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Project Finance
• Debt Capacity
• Debt Service Coverage Ratio
• Debt vs. Equity Financing
• See all commercial lending resources