Credit Implications and Pro-Forma Leverage
Chapters in this video
- 0:00 Why a debt-financed deal can clear valuation and still fail
- 1:12 Total debt/EBITDA leverage and the Jenga Tower analogy
- 2:03 EBITDA/interest coverage and the oxygen tank analogy
- 2:30 FFO/debt and the rating-agency cash-flow lens
- 2:51 Standard & Poor's, Moody's, Fitch downgrade triggers
- 3:40 Investment-grade-to-high-yield binary and exam trap
- 4:05 Credible deleveraging plans versus aspirational synergies
- 4:39 Existing covenant testing and amendment versus refinancing
- 6:39 Rapid-fire exam recap
What this video covers
- How to calculate and interpret total debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) as a leverage test against covenants and rating methodologies
- How to calculate and interpret EBITDA to interest coverage as a margin-for-error test in base and downside scenarios
- How to calculate and interpret funds from operations (FFO) to debt as the rating-agency cash-flow lens
- What triggers a downgrade: when the pro-forma credit profile no longer supports the existing rating under the applicable agency's methodology, not a single memorized leverage threshold
- Why crossing from investment grade to high yield is the most consequential downgrade binary on the exam
- Why a deleveraging plan can influence rating outcomes only if it is credible, based on free cash flow trajectory and track record rather than aspirational synergies
- How existing facility covenants are tested pro-forma on the combined entity, and the two resolution paths for a breach at close: amendment versus refinancing
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