% of EBITDA for senior debt service?

May 05, 2021

by a searcher from Queens University in Edmonton, AB, Canada

Hey SF Community,

Bank covenants aside, are there any guidelines/thoughts around how much of an acquired company's EBITDA should go to the senior lender note? In other words, just because the bank will give the leverage, is it safe to take it?

Thanks in advance.

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

EBITDA is not cash flow. If growth is zero, then a CapX intensive business will have maintenance CapX. If g>0, then you will there will be WC funding. If cash consumption of these two items is high you will have lower % of EBITDA available for debt service. Opposite is true if cash consumption of these items is low. In addition to these one has allow for seasonality and cyclicality. So, I don't think a guideline number asked in your question can exist..

Reply by a searcher
from University of California, Berkeley in San Francisco, CA, USA

Lenders will use their own definition of CF (i.e. EBITDA) available to determine debt capacity, factoring many items Mike above mentioned. But at a high level, FDIC banks are generally capped at 3.5x CF in a highly predictable industry/business with sufficient collateral support. Exception can be made up to 4.5x...these are bank regulators requirements. Lenders are most keen on DSC or FCC.

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