Adjusted EBITDA

Adjusted EBITDA is accounting EBITDA corrected for items listed in the facilities agreement, for the calculation of the covenants and of leverage at the origination of the financing. The adjustments remove, for example, costs presented as non-recurring, such as restructuring, acquisition or litigation costs, and add expected cost savings or synergies not yet achieved. In the Loan Market Association model agreement, the “Adjusted EBITDA” definition targets changes in scope first: the EBITDA of a company acquired or sold is counted as if the transaction had taken place on the first day of the test period. Borrowers ask to add the cost savings linked to the acquisition. Lenders respond by requiring that the corresponding costs be taken into account, with a cap and a period for achieving the savings. ECB Banking Supervision asks banks to justify any EBITDA enhancement and to submit it to a function independent of the business teams. In 2018 it noted that the actual leverage of borrowers was well above reported leverage, because of optimistic adjustments to pro forma EBITDA. For you, each adjustment accepted widens debt capacity and covenant headroom. Each adjustment must nevertheless withstand financial due diligence: the auditors the lenders appoint recalculate EBITDA from the accounts.

A group reports €24m of accounting EBITDA. It adds €2m of non-recurring restructuring costs and €1.5m of purchasing savings already committed, giving adjusted EBITDA of €27.5m. For a target leverage of 4.5x, the debt that can be considered rises from €108m to €123.75m. The lenders accept the €2m of restructuring and cap the savings at €1m.

• The closed list of adjustments allowed in the contractual definition.
• The cap on unrealised synergies and savings, as an amount or as a percentage of EBITDA.
• The period within which the savings must be achieved.
• Evidence for each adjustment in the financial due diligence.