Negotiating EBITDA and Financial Covenants in Middle ...
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Negotiating EBITDA and Financial Covenants in Middle Market Loan Agreements
THURSDAY, DECEMBER 12, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Today's faculty features: Jay Spader, Of Counsel, Brownstein Hyatt Farber Schreck, Denver Mark M. Oveson, Shareholder, Brownstein Hyatt Farber Schreck, Denver
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Negotiating EBITDA and Financial Covenants in Middle Market Loan Agreements
Presented by: Mark Oveson (BHFS) moveson@ Jay Spader (BHFS) jspader@
5 December 4, 2013
What is Middle Market?
? Borrower Size: ? Less than $500 million in annual revenue or $15 million to $100 million in EBITDA
? Loan Amount: ? Traditional Middle Market: up to $100 million ? Large middle market: up to $500 million
? Defining Market characteristics: ? Club Deals (relationship lending) ? Buy and hold mentality
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Why EBITDA? Cash Flow Lending
? Lender is focused primarily on Cash Flow in making credit decision (secondary focus on assets) ? Most Common Cash Flow Ratios:
? Fixed Charge Coverage Ratio ? Leverage Ratio
? EBITDA is a modified Cash Flow calculation that gauges recurring operational strength.
? EBITDA is more "comparable" when evaluating different companies than cash flow from operations, which is impacted by several factors that differ across companies (interest, tax, working capital).
? EBITDA is viewed as best proxy for cash-generating power on a comparable basis. ? EBITDA measurement is backward looking and generally covers past twelve months. This "flattens"
the numbers so that companies with seasonal businesses can stay in compliance.
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EBITDA
Simplified Income Statement ? Steps
Revenue (COGS) (SG&A) [EBITDA] (Depreciation)
(Interest Expense) (Taxes) Net Income
Distributions / Capitalized Outlays (such as CapEx)
Description
Proceeds from Sales
Costs of Goods Sold (an expense)
Sales, General and Administrative (an expense)
Not a GAAP concept, but would fit in here
A non-cash expense for current calculation period resulting from capitalizing past expenditures rather than expensing
Amounts to be paid in connection with debt financing (an expense)
(an expense)
The "Bottom Line" and where we start with an EBITDA definition. "Net Income" will itself be a defined term, starting from the GAAP concept of net income and making adjustments from there.
Uses of cash that are not expenses for purposes of determining net income and thus not add-backs.
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