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 company will be forced to hire more restructuring consultants, which will further increase their EBITDA.
- The bondholders will sue the bank for allowing such a permissive EBITDA definition.
- 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 IRS will audit the company because restructuring costs are not tax-deductible.
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