Debt Covenant Ratios, and Debt Fee Amortization
Debt covenant ratios are financial ratios detailing company thresholds needed to maintain certain levels of debt. Such ratios are typically determined by a lender and dictate the ability of a company to raise and maintain debt; important for determining how much of what type of debt one can raise in a leveraged buyout.
The most common types of financial ratios used in debt covenants are coverage ratios and leverage ratios. Depending on the company or lender, there can be a multitude of ratio combinations. Further the terms defining each ratio can be interpreted to have different meanings in different debt agreements. For example, total debt can mean all debts or just senior debt; total debt can include capital leases or exclude capital leases. Since the interpretations of these definitions differ from lender to lender or from company to company, it is always important to be very clear about the actual definition of the terms. A good analyst would always footnote his or her interpretation of the definitions. Because the definitions do vary, we will give general examples of a set of covenants here, but hold the understanding that this is just one view.
Coverage ratios help determine whether the cash or income produced by the business can meet the interest and other necessary payments to sustain the debt held in the business. There are several major types of coverage ratios.