Use both, plus a separate refinancing test. The OCC defines refinance risk as the risk that a borrower cannot replace existing debt at a future date on reasonable terms under prevailing market conditions. Passing an operating-year coverage test does not answer that maturity question. (occ.gov)
| Test | Calculation or evidence to request | Our recommended stress comparison |
|---|---|---|
| Annual DSCR | Lender-defined cash available for debt service divided by required debt service | Base and downside using the same lender definition |
| Monthly liquidity | Opening unrestricted cash plus dated receipts, payments and permitted funding | Lowest cash point, not average cash balance |
| Capital funding | Dated works and reserve balances, with draw conditions | Delayed reimbursement, cost overrun and unavailable reserve funds |
| Refinancing capacity | Debt supported by the future lender’s cash-flow, valuation and leverage constraints | Lower income, different interest terms and a weaker exit value |
| Maturity funding gap | Outstanding obligations and refinancing costs less supportable proceeds and available equity | No automatic assumption that an extension will be available |
Illustration: $1.2 million of annual lender-defined cash flow against $900,000 of annual debt service produces approximately 1.33× DSCR. If three consecutive quiet months each consume $60,000 after debt service, they require $180,000 of funding before a safety buffer, assuming no offsetting cash inflow during that period.
That illustration is arithmetic, not a lending standard. In the actual model, distinguish guest deposits, restricted reserves and genuinely available cash, and incorporate the specific loan’s cash-management rules.
When comparing debt proposals, request identical assumptions for draw timing, amortisation, fees, hedging, reserves, recourse, extensions and prepayment. A lower initial coupon should not decide the comparison before these items are reconciled.