hard · Private Credit underwriting-credit-analysis

From a cash-coverage and recovery standpoint, which critique of these two add-backs is most precise?

1. Both add-backs equally overstate distributable cash because neither the R&D capitalization nor the SBC add-back genuinely represents a true recurring cash expense of the business at all, so the lender should conservatively reverse the full $7.0 million to recover unadjusted cash earnings
2. The R&D capitalization understates cash EBITDA while the SBC add-back overstates it in exactly offsetting dollar amounts, so the two errors effectively cancel each other out entirely, and the reported $24.0 million figure is a fair, conservative proxy for debt-service capacity
3. The SBC add-back is defensible for cash-flow coverage since it is genuinely non-cash, but the R&D capitalization is the more dangerous adjustment because it converts a real cash outflow into a balance-sheet asset, inflating EBITDA without any corresponding cash, and it tends to recur
4. The R&D capitalization is actually the conservative adjustment here because it simply matches development cost to future product revenue under normal accrual accounting, while the SBC add-back is the truly aggressive item, since stock compensation dilutes equity holders and reduces recovery

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