medium · Private Credit underwriting-credit-analysis
A private debt fund is evaluating 'Meridian Logistics,' which reports an EBITDA of $40M. The sponsor proposes $10M in add-backs for 'projected synergies' and 'non-recurring restructuring costs.'
If the fund provides a $200M senior loan, how does the inclusion of add-backs affect the reported leverage ratio?
- Leverage remains at 5.0× because add-backs are non-cash items and are excluded from financial covenant testing.
- Leverage increases to 6.25× as the $10M add-back is treated as a debt-like liability for credit purposes.
- The leverage ratio is unaffected, but the Fixed Charge Coverage Ratio (FCCR) would drop due to the higher implied expense of the synergies.
- Leverage decreases from 5.0× to 4.0× because the denominator increases to $50M.
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