Interest Coverage Ratio

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---
schema: foundry-doc-v1
title: "Interest Coverage Ratio"
slug: interest-coverage-ratio
aliases:
  - topic-interest-coverage-ratio
short_description: "Debt-service metric requiring operating income to cover interest charges by at least 1.2×, balancing borrowing capacity against covenant compliance."
category: financial-model
type: reference
content_type: topic
quality: complete
status: active
audience: public
bcsc_class: public-disclosure-safe
language_protocol: PROSE-TOPIC
last_edited: 2026-05-25
editor: pointsav-engineering
paired_with: interest-coverage-ratio.es.md
cites: []
---

A minimum 1.2× interest coverage ratio constrains every Woodfine [[topic-direct-hold-framework|Direct-Hold]] asset — no new debt may be issued that would reduce operating-income-to-interest coverage below this floor. The constraint is established in the limited partnership agreement governing each direct-hold solution; it applies to the issuance of secured debentures and governs the borrowing capacity of the partnership. It operates alongside the [[topic-fiduciary-data-mandate|Fiduciary Data Mandate]] and the [[topic-equity-transfer-model|Equity Transfer Model]] as the third structural commitment applied per asset.

## Key takeaways

- Every Direct-Hold asset must maintain net operating income covering interest by at least 1.2×, blocking any new debt that would push coverage below this floor.
- The 1.2 threshold is established as a covenant in the limited partnership agreement; it provides a 20% operating buffer against vacancy, maintenance spikes, or short-term tenant disruption.
- Because the ratio applies per legally isolated asset vehicle, a debt-service shortfall in one asset cannot propagate to others or be masked by cross-subsidy from a stronger asset.

## What the ratio measures

ICR is the ratio of net operating income (NOI) to total interest obligations, where interest obligations exclude principal repayment. An ICR of 1.2 means the asset generates 1.2 dollars of net operating income for every dollar of interest owed. At exactly 1.0, income covers interest exactly. Below 1.0, the asset cannot service its debt from operating income without drawing on capital reserves.

The 1.2 floor provides a 20% operating buffer. A vacancy rate increase, a maintenance expense spike, or a short-term tenant disruption can reduce income without breaching the interest obligation.

## Why 1.2

The 1.2 threshold is a deliberate structural choice, not a regulatory minimum. Traditional commercial real estate lending typically requires ICR covenants in the 1.2–1.4 range. At 1.2, the corporate entity accepts a tighter margin in exchange for higher borrowing capacity — maximizing the deployable asset base while maintaining the mathematical assurance that operating income covers debt.

## Relationship to asset protection

The ICR floor is the primary mechanism by which the Direct-Hold architecture protects physical assets from foreclosure. A corporate entity that allows its ICR to fall below 1.0 enters a state where debt service depends on capital drawdowns — a structurally unstable condition that the [[topic-redemption-elimination|absence of a redemption queue]] would otherwise leave unmitigated. The 1.2 constraint prevents this by design.

A foreclosure event in one asset vehicle cannot propagate to others because each asset is legally isolated. The ICR applies per-vehicle — it cannot be satisfied by cross-subsidizing a weak asset with a strong one.

A portfolio that maintains 1.2x ICR indefinitely avoids forced asset sales triggered by debt-service shortfalls, preserving long-term equity value without requiring capital injections. The discipline is consistent with the [[topic-perpetual-equity-model|perpetual equity model]] applied to [[topic-investment-units|investment units]].

## See also

- [[topic-direct-hold-framework]] — the ownership structure that the ICR constraint protects
- [[topic-redemption-elimination]] — why no cash reserve pool exists alongside the ICR floor
- [[topic-fiduciary-data-mandate]] — the parallel data-sovereignty discipline applied to every Direct-Hold asset

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