Module IV· Debt RatiosAdvanced
Question
How do 'net debt' definitions differ between senior and total leverage ratios?
Answer
What
"Net debt" is not a fixed definition but context-dependent. Three main contexts with different scope:
- In the credit agreement (covenant test): typically only Senior + Mezzanine, excluding shareholder loans and any pension deficit. Cash is deducted.
- In the equity purchase price bridge: broader — pension deficit, IFRS 16 lease liability, and Vendor Loans usually count as debt-like.
- In comparables pricing: a sector-specific convention, important for apples-to-apples comparisons.
The sponsor must explicitly clarify the relevant definition, otherwise inconsistent net-debt assumptions create pricing risk.
Deep diveShow more details
Comparison of typical net-debt definitions
| Item | Senior leverage | Total leverage | EV bridge |
|---|---|---|---|
| Senior bank debt | yes | yes | yes |
| Senior notes / TLB | yes | yes | yes |
| Second lien | no | yes | yes |
| Mezzanine | no | yes | yes |
| Shareholder loan | no | no (typical) | no |
| Holdco PIK | no | no (structurally subordinated) | disputed |
| Vendor Loan | disputed | usually yes | yes |
| Pension deficit | disputed | usually yes | yes |
| IFRS 16 lease liability | usually no ("frozen GAAP") | disputed | yes |
| Cash | deducted | deducted | deducted |
Common pitfalls
- Junior analysts treat "net debt" as one-size-fits-all: wrong.
- For comparables the sector convention matters (SaaS often excludes IFRS 16, machinery includes it).
- Forgetting the IFRS 16 lease liability: in capital-intensive sectors a material net-debt component.
Pitch tip
Question: "How do you define net debt in the pitch?"
Answer: "Broader in pricing — add pension, IFRS 16 lease, and Vendor Loan. Narrower in the covenant test — typically Senior + Mezzanine. Clarify both definitions explicitly, because sector-specific conventions vary"