From private-credit
This skill fires automatically when working with EBITDA calculations, addback analysis, compliance certificate reconciliation, or any workflow that requires bridging from reported to adjusted EBITDA.
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This skill fires automatically when working with EBITDA calculations, addback analysis, compliance certificate reconciliation, or any workflow that requires bridging from reported to adjusted EBITDA.
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This skill fires automatically when working with EBITDA calculations, addback analysis, compliance certificate reconciliation, or any workflow that requires bridging from reported to adjusted EBITDA.
Always build EBITDA from the bottom up. Start with Net Income and add back each component to verify you can reach Reported EBITDA before layering credit agreement adjustments.
Net Income
+ Income Tax Expense (use actual tax, not provision adjustments)
+ Depreciation & Amortization
+ Interest Expense
= Reported EBITDA
This number should tie to whatever the borrower labels as "EBITDA" or "Operating EBITDA" in their financials. If it does not, investigate before proceeding. Common causes of mismatch: the borrower may include or exclude items below the operating line differently than you expect (FX gains/losses, other income/expense, non-cash impairments).
From Reported EBITDA, apply the adjustments permitted under the credit agreement. The compliance certificate will itemize these if the borrower provides a detailed cert. Categories typically include:
Reported EBITDA
+ Non-cash charges (stock-based comp, non-cash rent, impairments)
+ Permitted restructuring / transformation addbacks (subject to caps)
+ Management fees (if not already above the line)
+ Transaction / M&A costs
+ Pro forma acquisition EBITDA (for tuck-ins during the LTM period)
+ Run-rate cost savings / synergies (subject to credit agreement terms)
+ Other permitted addbacks per credit agreement
= Adjusted EBITDA (Covenant Compliance EBITDA)
Best practice is to track Reported EBITDA on a rolling LTM basis and then layer adjustments separately. This lets you:
If the LTM build-up does not tie to the cert, investigate. Do not assume an error — it is usually an explainable difference (see reconciliation challenges below).
As a secondary verification, calculate EBITDA from the cash flow statement:
Net Income (from CFS)
+ Income Taxes (add back)
+ Interest Expense (add back)
+ Depreciation & Amortization (add back from CFS)
= EBITDA (CFS-derived)
Compare this to your P&L-derived Reported EBITDA. They should be close. Differences arise from non-cash items classified differently between the P&L and CFS, but this is a useful gut check on magnitude.
Some borrowers provide only: Revenue → Gross Profit → Adjusted EBITDA. No detail on operating expenses, no D&A breakout, no interest or tax detail. When you receive this:
When a borrower completes an acquisition during the LTM period, the compliance cert will include a pro forma adjustment for the acquired company's pre-acquisition EBITDA. This acquired EBITDA figure is usually itself adjusted (the acquired company's adjusted EBITDA, not reported). You will not be able to independently decompose this into the acquired company's revenue, expenses, and addbacks on a historical basis.
How to handle:
Some addback categories include amounts that sit within cost of goods sold. The borrower reports gross profit as a single line (net of these), then lists the full addback amount on the compliance cert. A portion of the cert addback is already reflected in gross profit, which can create an apparent mismatch.
How to handle:
Borrowers may introduce a new addback category in Q3 and apply it retroactively to Q1 and Q2 for LTM calculation purposes. This causes your prior quarterly spreads to not tie to the new LTM cert.
How to handle:
When evaluating a borrower's true cash flow generation ability, you must understand which EBITDA adjustments are cash and which are non-cash.
Rule: When assessing the borrower's ability to service debt, generate free cash flow, and maintain liquidity, always distinguish between cash and non-cash adjustments. Adjusted EBITDA per the cert is the right number for covenant compliance. It is not necessarily the right number for assessing debt service capacity.
Credit agreements typically impose caps on certain addback categories. Common structures:
You cannot change what the borrower reports on their compliance certificate. Push-back happens in two places: (1) conversations with the management team, and (2) internal credit discussions when you assess the borrower's true free cash flow generation capacity.
Apply this framework to each addback category:
| Condition | Action |
|---|---|
| Same addback appearing at similar levels for 3-4 consecutive quarters | Not one-time. Highlight. Consider excluding from internal FCF view. |
| Single category > 5% of EBITDA | Noteworthy. Highlight. Investigate what is included. |
| Single category > ~$500K on a $15-20M EBITDA business | Definitely highlight. May exclude if you believe it is not legitimate. |
| Single category < ~$100K on a $15-20M EBITDA business | Immaterial. Ignore unless pattern across multiple small categories. |
| Multiple categories individually < 5% but aggregating to > 10-15% | Flag the aggregate. Individually small does not mean collectively immaterial. |
"Restructuring / Transformation / Operational Improvement / M&A Expenses" — This category is the most broadly defined in most credit agreements. Companies can classify a wide range of expenses under these labels. Key watchpoints:
A good analyst tracks addback realization across quarters:
Flag this trend and notify if new adjustments are coming on or existing ones are trending higher instead of rolling off as expected.
The credit agreement specifies the permitted realization window for run-rate synergies and cost savings — typically 12 to 24 months from the date of the action giving rise to the synergy. Do not apply a different timeline than what the agreement specifies unless it has been amended.
When the borrower projects the same synergies quarter after quarter without visible P&L improvement:
For acquisition-intensive businesses, pro forma synergies layer on top of pro forma acquired EBITDA. Each tuck-in may come with its own synergy estimate. Track:
This is especially important for roll-up businesses where EBITDA can include multiple layers of pro forma adjustments and synergies from acquisitions at different stages of integration.