hard · Corporate Credit Analysis
A company has $100 million of annual EBITDA and $20 million of annual interest expense.
If interest rates rise such that the interest expense increases to $40 million, and EBITDA remains flat, how does the 'EBITDA / Interest' coverage ratio change in terms of credit risk assessment?
- The risk decreases because the higher interest expense creates a larger tax shield, increasing net income.
- The ratio drops from 5.0x to 2.5x, moving the company from a comfortable 'investment grade' buffer to a 'speculative grade' buffer.
- The risk remains the same because the total debt balance has not increased.
- The ratio remains 5.0x because coverage is always calculated using the 'Opening' interest rate of the debt.
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