EBITDA Add-backs in Debt Contracting: A Step Too Far?

Miguel Faria-e-Castro, Radhakrishnan Gopalan, Avantika Pal, Juan Sanchez and Vijay Yerramilli

No 2022-029, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Financial covenants in syndicated loan agreements often rely on definitions of EBITDA that deviate from the GAAP definition. We document the increased usage of non-GAAP addbacks to EBITDA in recent times. Using the 2013 Interagency Guidance on Leveraged Lending, which we argue led to an exogenous increase in non-GAAP EBITDA addbacks, we show that these addbacks increase the likelihood of loan delinquency and default, and also increase the likelihood of the borrower experiencing a ratings downgrade. Greater use of non-GAAP EBITDA addbacks also makes it more likely that lead arrangers lower their loan share exposures through secondary market sales. Our results highlight that covenants based on customized measures of EBITDA hurt loan performance by worsening lead arrangers’ incentives to monitor borrowers and by hampering their ability to take timely corrective actions.

Keywords: syndicated loans; credit agreements; financial covenants; EBITDA; add-backs; GAAP; leveraged lending guidance; borrower performance; loan performance; lead arranger; lender monitoring; loan sales (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 G32 G34 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2022-09-22
New Economics Papers: this item is included in nep-ban and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2022/2022-029.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:94811

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2022.029

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().