hard · Private Credit underwriting-credit-analysis
An LBO model shows a Year 3 Debt/EBITDA of 4.5× and an Interest Coverage Ratio of 1.8×.
If the lender's 'Incurrence' covenant for acquisitions is 4.0× and the 'Maintenance' covenant is 5.0×, can the company complete a debt-funded bolt-on acquisition?
- No, because incurrence covenants are tested at the time of a specific action (like an acquisition), and the company currently exceeds the 4.0× threshold.
- Yes, as long as the pro-forma leverage after layering in the new acquisition's EBITDA still falls below the 5.0x maintenance covenant limit.
- No, because the interest coverage ratio of 1.8x falls well below the 2.0x minimum threshold typically required by lenders for all PE-backed bolt-on acquisitions.
- Yes, because the company remains fully in compliance with its existing 5.0x maintenance leverage covenant, and no incurrence test applies to this transaction.
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