Module IV· Debt RatiosAdvanced
Question
How do you assess debt capacity in the 'maximum leverage test' when preparing a pitch?
Answer
What
The maximum leverage test is a structured analysis of how much debt the target can carry. In the pitch, typically five tests are applied in parallel:
| Test | Formula | Middle-market range |
|---|---|---|
| Senior leverage cap | Senior Debt / EBITDA | 4.0–5.5x |
| Total leverage cap | Total Debt / EBITDA | 5.0–6.5x |
| Coverage test | EBITDA / Cash Interest | min 2.0–2.5x |
| Coverage after capex | (EBITDA − Capex) / Cash Interest | min 1.5–2.0x |
| FCF / debt repayment | FCF / mandatory amortization | min 1.5x |
Deep diveShow more details
Structured approach in the pitch
- Assess EBITDA stability: a volatility score by sector, cyclicality, customer concentration.
- Capex profile: higher → lower leverage capacity.
- Stress test: at −20% EBITDA is coverage still above 1.5x?
- Sector benchmark: comparables from the middle market.
Sector sensitivity (typical max senior leverage)
| Sector | Max senior leverage |
|---|---|
| Software / SaaS | 6.0–7.0x |
| Healthcare services | 5.5–6.5x |
| Middle-market industrials (stable) | 4.5–5.5x |
| Machinery (cyclical) | 4.0–5.0x |
| Construction suppliers | 3.5–4.5x |
| Consumer (volatile) | 3.0–4.0x |
Pitch proposal with three scenarios
Aggressive 5.5x senior + 1.5x sub = 7.0x total; Standard 5.0x + 1.0x = 6.0x; Conservative 4.5x + 0.5x = 5.0x.
Pitch tip
Question: "What senior leverage would you propose?"
Answer: "Sector-specific. For middle-market machinery 4.5–5.0x as the base case, 5.5x in the aggressive case with clearly demonstrated synergies. Above 5.5x the lender turns conservative — coverage above 2.0x is then no longer guaranteed"