Leveraged lending guidelines have set six times total leverage as the limit above which a loan would likely be criticized by examiners. Less noted by the media, but of growing interest to market players, are the components of leverage metrics; specifically, how the numerator (debt) and the denominator (cash flow) are being massaged to put the best face on increasingly leveraged transactions.

Let’s look first at the debt definition: guidelines specify total debt to cash flow. That includes not only the loan being syndicated, but any other corporate debt whether bonds, subordinated debt, or even a holding company instrument. Holcos often get overlooked, but rating agencies consistently sweep any security or tranche with a coupon under the debt umbrella. That’s because parent company debt is usually serviced by OpCo cash flows.

Also often missed is that the calculation includes committed debt. That means not only undrawn capacity under a revolving credit facility, but any additional debt allowable under the credit agreement. Leveraged borrowers often have baskets with built-in incremental capacity. Regulators assume they are drawn day one.

Ebitda is one of the most universal accounting concepts in corporate finance, but it is not actually defined under GAAP. Not being grounded in generally accepted accounting principles means Ebitda and its variants exist in a gray area when it comes to underwriting standards.

Any first-year lev fin analyst is familiar with “adjusted” Ebitda. The nature of these adjustments is as varied as the types of expenses incurred by private equity sponsors buying businesses. For example, if there are expected employee layoffs as part of a merger with an existing platform business, the cost of severance and transition expenses can be added back to Ebitda.

Another common “add-back” is