Size Debt With Interest Coverage
Estimate debt capacity from interest coverage and downside EBITDA.
Base EBITDA is $18 million. Management wants to size debt using a 15% downside case, a minimum interest coverage target of 3.0x, and an estimated cash interest rate of 8.5%. Maximum debt by interest coverage = downside EBITDA / target coverage / cash interest rate. The common trap is to use base EBITDA and stop at interest coverage, ignoring principal amortization, capex, taxes, and covenant cushion. Build downside EBITDA $18.0M x (1 - 15%) = $15.3M downside EBITDA. Debt should be sized to a defendable miss, not only the base plan. Find maximum annual interest $15.3M / 3.0x = $5.1M…
Sign up free — one personalized lesson every day, matched to your role and goals.
Already have an account? Sign in