Module IV· Debt RatiosBasic
Question
What are the 5 most important debt ratios in an LBO model?
Answer
Standard set
| # | Ratio | Formula | Middle-market |
|---|---|---|---|
| 1 | Senior Debt / EBITDA | Senior / EBITDA | 4.0-5.5x |
| 2 | Total Debt / EBITDA | Total / EBITDA | 5.0-6.5x |
| 3 | EBITDA / Cash Interest | EBITDA / Int | 2.0-3.5x |
| 4 | (EBITDA − Capex) / Int | FCF cov | 1.5-2.5x |
| 5 | FCF / Total Debt | FCF / Debt | 8-15% |
Rule of thumb
Debt multiples = pricing driver. Coverage ratios = covenant driver.
Pitch tip
The most sensitive ratios are coverage — a 50bps spread increase pushes them down noticeably.