EBITDA

EBITDA (earnings before interest, taxes, depreciation and amortisation) is the balance between operating income and the operating expenses that sooner or later result in a cash movement. It differs from operating profit because it excludes depreciation and amortisation charges and provisions for impairment of fixed assets. In France, the excédent brut d’exploitation (EBE) is its equivalent. In private debt financing, EBITDA is the basis for leverage, which divides net debt by EBITDA, and for financial covenants. The facility agreement itself defines the EBITDA used for these calculations. This contractual definition adds or removes items from accounting EBITDA, called adjustments or add-backs: non-recurring costs, expected synergies from an acquisition, the twelve-month contribution of a company bought during the year. Each accepted adjustment increases covenant EBITDA, lowers reported leverage and widens the borrower’s headroom under its covenant. Adjustments to EBITDA remain a point of negotiation in leveraged financings, including when the financial covenant is triggered only above a drawing threshold on the revolving credit facility. For the borrower, the consistency between the EBITDA in the business plan presented to lenders and the EBITDA defined in the agreement determines the real headroom under each ratio.

A company reports €22m of accounting EBITDA and €88m of net debt, a leverage of 4.0x. The facility agreement accepts €3m of non-recurring restructuring costs as an adjustment. Covenant EBITDA rises to €25m and leverage falls to 3.52x, below a covenant set at 4.0x.

• The contractual definition of EBITDA and the list of permitted adjustments
• The cap applied to synergies and non-recurring costs
• The treatment of acquisitions and disposals made during the test period
• The consistency between the business plan EBITDA and the agreement EBITDA