Total leverage ratio

The total leverage ratio, or total leverage, divides all financial debt by EBITDA. It is the central ratio of leveraged financings: it is used to size the debt at origination, to set the main covenant and to vary the margin through a grid (margin ratchet) indexed to its level. In the Loan Market Association model, it is calculated on total debt, gross or net of cash, over a rolling twelve months, and tested every quarter. A variant, senior leverage, counts only senior debt when the financing includes a subordinated tranche. ECB Banking Supervision classes as a leveraged transaction any financing after which total debt exceeds 4x EBITDA, or any financing where a private equity fund controls the borrower. It asks that transactions above 6x remain exceptional. For this calculation, total debt includes committed undrawn amounts, cash is not deducted and EBITDA is that of the pro forma statements of the combined entity resulting from the transaction. These rules apply to banks. Private debt funds set their own definitions. For you, the definition of debt and of EBITDA in the agreement carries as much weight as the headline multiple.

A group carries €130m of gross debt and €15m of cash, for €25m of EBITDA. Its gross leverage comes out at 5.2x and its net leverage at 4.6x. The agreement sets a net leverage covenant at 5.5x, which leaves 16% of EBITDA headroom before a breach, and a grid that reduces the margin by 0.25 point below 4.0x.

• The calculation gross or net of cash.
• The debts included: leasing, lease liabilities, earn-outs, shareholder loans.
• The EBITDA definition used and its adjustments.
• The covenant level and its step-down path over the life of the loan.
• The margin grid indexed to leverage.