medium · Private Credit underwriting-credit-analysis
A borrower, 'Summit Retail,' has $100.0M in EBITDA and $400.0M in Net Debt (4.0x leverage). The company conducts a 'Dividend Recapitalized' by borrowing an additional $150.0M to pay a dividend to the PE sponsor.
If the interest rate is $8% and EBITDA remains flat, what is the impact on 'Interest Coverage' (EBITDA / Interest)?
- Coverage declines to 1.50x
- Coverage remains stable as leverage is under 6.0x
- Coverage declines from 3.13x to 2.27x
- Coverage increases because the sponsor's equity is reduced
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