EBITDA is meant to approximate operating performance.
But now, it’s more of a marketing tool.
As low rates fueled a deal boom, lenders competed aggressively to win mandates.
In turn, borrowers extracted looser credit documents including broader addbacks.
Today, 5.0x leverage means something very different than it did a decade ago.
Read the full breakdown below.
The EBITDA Miss
In late April, S&P released a jarring report on company performance following M&A and LBO transactions.
The research found that 92% of companies underperform EBITDA projections in Year 1 following the deal.
Most notably, the gap between PE owned and non-PE owned companies was stark.
Underperformance in PE deals, measured by the miss on projected leverage, was ~75% higher than non-PE ones.
The main driver is increasingly aggressive addbacks, which have become standard practice in PE.
The Addback Creep
One of the most consequential areas in a credit agreement is the definition of EBITDA.
Credit documents allow borrowers to addback certain items when calculating the figure, like nonrecurring items, restructuring costs, and cost savings and synergies.