Assess a private borrower's credit profile and compute and interpret the ratios lenders rely on to price and value the debt
The idea
The credit profile covers seniority, security, covenants, maturity and amortisation, sponsor support, business risk and the stability of cash flow. The core ratios are leverage = total debt ÷ EBITDA, interest coverage = EBITDA ÷ interest expense, the stricter (EBITDA − capex) ÷ interest, fixed-charge coverage, and loan-to-value = debt ÷ enterprise or collateral value. For EBITDA of 50, debt of 250, interest of 20 and capex of 15. Leverage is 5.0×, interest coverage 2.5× and coverage after capex 1.75×. Judge these figures against covenant levels, peer deals and the tranche's attachment point in the capital structure, then decide whether the spread pays for the risk. The trap: EBITDA inflated by aggressive add-backs flatters every ratio.
Formulas
Leverage of a private borrower
leverage = total debt ÷ EBITDA
- total debt
- all debt ranking in the capital structure
- EBITDA
- earnings before interest, tax, depreciation and amortisation
Judge it against covenant levels and peer deals. EBITDA inflated by generous add-backs flatters this and every other coverage ratio.
Interest coverage of a private borrower
interest coverage = EBITDA ÷ interest expense
- EBITDA
- earnings before interest, tax, depreciation and amortisation
- interest expense
- interest payable on the debt
The stricter version deducts capital expenditure from EBITDA first, which matters for businesses that must keep reinvesting to stand still.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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