medium · Debt Capital Markets credit-ratings-risk
If a borrower is in compliance with their leverage covenant only because they added back 'one-time restructuring costs,' what is a key concern for a credit analyst?
- The firm will be compelled to retain still more restructuring consultants, whose advisory fees then push reported EBITDA even higher.
- The bondholders will sue the arranging bank for having permitted such a loose, permissive add-back definition of EBITDA in the deal.
- The 'quality of earnings' is low, and the borrower may struggle to meet the covenant in future quarters if those costs prove to be recurring.
- The tax authority will audit the company on the theory that one-time restructuring charges can never be treated as deductible business expenses at all.
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