Rick Giovannelli 1:44 pm on April 10, 2020  

Revisiting Fed “Red Line” EBITDA Addbacks

With the importance of EBITDA in setting the loan size limits in both MSNLF (4X) and MSELF (6X), we wanted to highlight some of the commentary and controversy around EBITDA add-backs and just how “adjusted” “Adjusted EBITDA” can be:

  • Back in 2016, the Fed questioned the way lenders calculated EBITDA in some deals (see: The Ultimate EBITDA Fighting Championship 10/16/16), however in 2018, both the OCC and the Fed stated that that the Leveraged Lending guidance is non-binding.
  • When The Cycle Turns: The Continued Attack Of The EBITDA Add-Back (S&P 9/19/19 – open in IE for correct formatting) – “The absence of a uniform and commonly accepted definition of EBITDA is the key issue here. In practice, it is and has always been a negotiated definition, varying from (credit) agreement to agreement… (S&P Global Ratings defines EBITDA as revenue minus operating expenses plus depreciation and amortization (including noncurrent asset impairment and impairment reversals). We include cash dividends received from investments accounted for under the equity method and exclude the company’s share of these investees’ profits. This definition generally adheres to what EBITDA stands for: earnings before interest, taxes, depreciation, and amortization. However, it also excludes certain other income statement activity that we view as nonoperating.)”
  • Risk is just fine… (Bloomberg 3/1/18) –
    • Chariman Powell – “In the case of leverage lending guidance we do accept and understand that’s non-binding guidance…”
    • Otting of OCC – Institutions should “have the right to do leveraged lending the way they want.”
  • EBITDA Mocked… (Bloomberg 10/20/17) – A Moody’s analyst defines EBITDA as “Eventually Busted, Interesting Theory, Deeply Aspirational.”