Borrowers manipulating Ebitda to avoid covenant breaches

Author: Olly Jackson | Published: 23 Nov 2018

European borrowers are increasingly manipulating Ebitda figures to avoid covenant breaches. In some instances, management is overstating the company’s revenue position to stay on track with their incentive plans, according to London sources.

"People talk about the market overheating," said a partner at a global law firm. "On some deals add-backs have caused Ebitda [the calculation to determine a loan’s leverage ratio] to be 50%, or even 100% higher than originally stated."

Financing documents are now as favourable as they have ever been. These offer borrowers a number of pre-agreed ways to enhance Ebitda through uncapped add-backs and synergies because of permitted acquisitions and restructurings.

More trigger events 

There are a number of ways Ebitda can be manipulated to get through a covenant breach, for example, with projected cost savings. The list of trigger events that would allow cost savings to be anticipated has increased significantly over the last few...