medium · Debt Capital Markets credit-ratings-risk
Why do lenders use 'EBITDA' instead of 'Net Income' for leverage and coverage covenants?
- It provides a better proxy for the cash flow available to service debt by stripping out non-cash charges and tax effects.
- Lenders are prohibited by law from using Net Income in legal contracts.
- It is a GAAP-regulated figure that prevents companies from manipulating their earnings.
- It always results in a higher number, making the company look more profitable than it actually is.
Sign up free to see the explanation and track your rank →
More Debt Capital Markets credit-ratings-risk practice
- In the context of Debt Capital Markets, what is a leverage-based margin ratchet?
- Why is the Administrative Agent's role important for the margin ratchet?
- In Debt Capital Markets, who is generally the 'payer' of the credit spread in a standard b
- What happens to the credit spread of a 'fallen angel' issuer?
- In the expected loss framework, what is the relationship between the Recovery Rate (RR) an
- What is the lowest rating an issuer can hold and still be considered 'Investment Grade' by
- In a Credit Default Swap (CDS), what is the primary obligation of the protection seller?
- What does a 'negative basis' indicate?