How does a goodwill impairment affect covenants and creditworthiness?
A goodwill impairment is non-cash and often not tax-deductible — but it is a very real loss of equity value with far-reaching consequences:
- Net debt / EBITDA covenant: a goodwill impairment is EBITDA-neutral (non-cash, though typically sitting in OPEX), so there is NO direct covenant effect. The underlying operating deterioration that triggers the impairment usually also hits EBITDA — so indirect covenant pressure arises.
- Equity-ratio covenant: a goodwill impairment reduces equity directly. For companies heavy in goodwill, a covenant breach can result.
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ProSiebenSat.1 took a goodwill impairment of ~$400m in 2018 — temporary equity-ratio pressure.
S&P and Moody's treat a goodwill impairment as a symptom, not a cause — a downgrade typically comes BEFORE the impairment, based on operating trends.
an impairment announcement typically triggers a share-price move of −5% to −15%, because the market has already priced in the underperformance — but management credibility takes a further hit.
'For targets with goodwill > 30% of total assets, run an equity-ratio stress test in DD — in a 25% impairment scenario the equity ratio would fall from 35% to 28%, critical against a private-placement covenant of 30%'.