Worked example — MidCap Software Inc: TLB $200m, spread SOFR + 425 bps, current SOFR 5.3%. Calculate Year-1 interest and cash interest coverage at EBITDA $50m.
Starting data:
- TLB: $200m (bullet, 7 years)
- Spread: SOFR + 425 bps
- Current SOFR: 5.3% → all-in coupon = 9.55%
- EBITDA: $50m
- Assumed year-end TLB balance: $188m (after $12m amortization)
Calculation:
```
Average Balance: (200 + 188) / 2 = $194m
Interest Expense: 194 × 9.55% = $18.53m
Cash Interest Coverage: 50 / 18.53 = 2.70x
```
Coverage of 2.70x is solid — lenders typically want above 2.0x. Noticeably sensitive when rates rise.
Deep diveShow more details
If SOFR rises from 5.3% to 6.0%, the all-in coupon climbs to 10.25%, interest expense grows to $19.89m, and coverage falls to 2.51x. A +100 bps move in SOFR pushes coverage down by about 0.2x.
When does coverage hit the 2.0x trigger? At an all-in coupon of about 12.9% — which corresponds to SOFR around 8.65%, i.e. +335 bps versus today. Very unlikely in the current rate cycle, but standard as a stress test in modeling.
Sponsors often hedge 50–75% of the floating exposure with interest-rate swaps or caps. Cost is typically 50–150 bps p.a. — it reduces volatility but costs yield when rates fall.
Question: "At what SOFR rate would coverage fall to 2.0x?"
Answer: "At an all-in coupon of about 12.9% — so with SOFR around 8.65%. That's unlikely in the current cycle, but important as a stress test in modeling. A 50–75% interest-rate hedge is standard to dampen volatility during rate spikes"