medium · Private Credit underwriting-credit-analysis
If a borrower has an EBITDA of $20 million and a $100 million loan with a 5% PIK rate, and EBITDA grows at exactly 5% per annum, what happens to the leverage ratio over time?
- The leverage ratio decreases because EBITDA growth compounds faster than PIK interest.
- The leverage ratio remains constant only if the borrower pays the PIK portion in cash.
- The leverage ratio increases because the debt is growing.
- The leverage ratio remains constant at 5.0x.
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