hard · Private Credit & Debt 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 R&D capitalization nor SBC represents a true recurring expense, so the lender should reverse the full $7.0 million to recover the unadjusted earnings base
2. The R&D capitalization understates cash EBITDA while the SBC add-back overstates it, so the two errors offset and the reported figure is a fair 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 conservative because it matches cost to revenue over time, while the SBC add-back is the aggressive item since stock compensation dilutes equity holders and therefore reduces enterprise recovery value

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