LTV, the equity cushion and the point at which a sponsor-backed loan starts to lose money, worked on one illustrative buyout.
Loan-to-value on a direct lending deal is total debt through your tranche divided by enterprise value, which is the same as leverage divided by the valuation multiple. A $200.0m loan at 6.25x EBITDA on a company bought at 11.5x has an LTV of 54.3 per cent and a 45.7 per cent equity cushion. That cushion is shared between EBITDA and the multiple: if the multiple falls to 8.0x, EBITDA can drop only 21.9 per cent before the loan is impaired.
Worked in full in The Private Credit Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Leverage tells a lender how much debt the business carries against its earnings. LTV tells it how much value sits beneath the loan. Credit committees ask for both, and the useful part is the conversion between them, because that is where a comfortable-looking cushion turns out to depend on a purchase multiple nobody controls.
| Input | Value |
|---|---|
| Adjusted EBITDA | 32.0 |
| of which add-backs not yet realised | 4.0 |
| Purchase multiple | 11.5x |
| Unitranche term loan (6.00x) | 192.0 |
| Revolver drawn at close, pari passu | 8.0 |
| Total debt through the lender's tranche | 200.0 |
Enterprise value = 32.0 × 11.5 = 368.0
Leverage = 200.0 ÷ 32.0 = 6.25x
LTV = 200.0 ÷ 368.0 = 54.3%, or equivalently 6.25 ÷ 11.5 = 0.543
Equity cushion = 1 − LTV = 45.7%, or $168.0m
In Excel: =Debt/(EBITDA*Multiple), with the debt including every claim that ranks equal or ahead.
The numerator must include everything that ranks with or ahead of you: the drawn revolver here, and any super senior or first-out piece in a split unitranche. A last-out lender's LTV is measured through the first-out above it, which is why last-out tranches carry visibly higher LTVs on the same company.
The loan is impaired, before any costs of enforcement, when enterprise value falls below $200.0m. At the purchase multiple that is a 45.7 per cent fall in EBITDA, or a fall in the multiple to 6.25x with EBITDA flat. Neither is how a downturn arrives. Earnings and multiples fall together, so the right question is how much EBITDA can lose at a lower multiple.
EBITDA at the loss point = Debt ÷ Multiple
At 9.5x: 200.0 ÷ 9.5 = 21.05, a fall of 34.2%
At 8.0x: 200.0 ÷ 8.0 = 25.00, a fall of 21.9%
At 6.5x: 200.0 ÷ 6.5 = 30.77, a fall of 3.8%
A 45.7 per cent cushion becomes 21.9 per cent of EBITDA protection the moment the multiple compresses to 8.0x. The cushion was always an amount of value, and how much of it is real depends on what a buyer would pay in the year the lender needs it.
| EBITDA change | EBITDA | Leverage | 11.5x | 9.5x | 8.0x | 6.5x |
|---|---|---|---|---|---|---|
| None | 32.0 | 6.25x | 54.3% | 65.8% | 78.1% | 96.2% |
| −10% | 28.8 | 6.94x | 60.4% | 73.1% | 86.8% | 106.8% |
| −20% | 25.6 | 7.81x | 67.9% | 82.2% | 97.7% | 120.2% |
| −30% | 22.4 | 8.93x | 77.6% | 94.0% | 111.6% | 137.4% |
Above 100 per cent the loan is under water and the reciprocal is the gross coverage: at a 30 per cent EBITDA fall and 8.0x, enterprise value is $179.2m and covers 89.6 cents of each dollar of debt; at 6.5x it is $145.6m and 72.8 cents, before restructuring costs. A 20 per cent decline at 8.0x leaves an LTV of 97.7 per cent: technically covered, practically a negotiation.
LTV and leverage are one number seen twice. Because LTV = leverage ÷ multiple, a lender who caps leverage and ignores the purchase multiple has not capped LTV. The same 6.25x is 54.3 per cent at 11.5x and 78.1 per cent at 8.0x.
The other moving part is the revolver. Only the drawn amount sits in the closing LTV, but a borrower under pressure draws its revolver in full before anyone asks, so the debt in the stressed cells is likely to be higher than the debt at close. A lender ranking pari passu with the revolver should run the grid on the fully drawn commitment as well as on the drawn balance, because the stress case is precisely when the undrawn part is used.
The common mistake is to compute LTV on the sponsor's adjusted EBITDA and the sponsor's purchase price, and stop there. Both are the buyer's numbers. Take out the $4.0m of add-backs that have not yet been realised and EBITDA is $28.0m: leverage is 7.14x, and at the same 11.5x the enterprise value is $322.0m, an LTV of 62.1 per cent and a cushion of 37.9 per cent. At 9.5x on that reported EBITDA, a 24.8 per cent fall is enough to reach the loss point.
The second mistake is to leave LTV at its closing value. Marking the same company at 9.5x on unchanged earnings moves the LTV to 65.8 per cent without a dollar of new debt or a cent of lost EBITDA. The quarterly monitoring pack should carry the current LTV, not the one in the credit memo.
The book's lender model, with its base, downside and stress cases on a 6.25x unitranche, is in the free workbook for this case. How much a thin downside case really leaves is worked in how much room a 1.15x downside actually leaves, and the add-back question in what an EBITDA add-back bridge is actually worth.
There is no single threshold, and the number means little without the multiple behind it. An LTV of 54.3 per cent at an 11.5x purchase multiple leaves less real protection than the same LTV at 8.0x, because the higher multiple has further to fall. Judge the LTV by the EBITDA decline it survives at a stressed multiple: here 21.9 per cent at 8.0x.
They are two sides of one number. The equity cushion is one minus the LTV: the share of enterprise value that must be lost before the debt is impaired. In the worked case the LTV is 54.3 per cent, so the cushion is 45.7 per cent, or $168.0m of sponsor equity at the purchase price.
Use both and show the gap. On $32.0m of adjusted EBITDA the loan is 6.25x and 54.3 per cent LTV. Strip out $4.0m of unrealised add-backs and the same debt is 7.14x and 62.1 per cent, with the cushion down from 45.7 to 37.9 per cent.
This article is one calculation from The Private Credit Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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