EBITDAC: How companies may seek to increase debt by ‘adding back’ pandemic losses

As an example of the practice surfaces, an industry body is warning other companies not to use the covid-19 outbreak as an excuse to try and raise additional finance through flexible documentation.

Last week, it emerged that Blackstone-owned Schenk Process, a German measuring instrument manufacturer, had used “adjusted EBITDAC” in its quarterly report to “add back” €5.4 million of profits it claims it would have made had it not been for the coronavirus pandemic.

This has prompted the European Leveraged Finance Association, a professional trade body representing the interests of investors, to issue a warning to other companies thinking of using EBITDAC (earnings before interest, taxes, depreciation, amortisation and coronavirus) as a way of raising additional finance.

With many companies scrambling for additional liquidity due to steep declines in revenues and earnings, some are looking at the additional debt capacity they may be able to incur based on calculations around EBITDA.

In the borrower’s market that has prevailed over the past few years, so-called “EBITDA addbacks” have allowed many borrowers to base the amount they can borrow not just on actual revenues but also on potential revenues. In the case of EBITDAC, borrowers would claim that their revenues would have been a certain amount higher had it not been for coronavirus – and that coronavirus losses should effectively be added back to the EBITDA figure used to calculate allowable debt capacity.

In a statement, ELFA said using EBITDAC “would allow companies to incur indebtedness, including debt that primes existing investors, against backward-looking metrics stripped of the effects of the pandemic only to wind up with more leverage against an uncertain post-covid level of forward earnings and cashflow”.

ELFA urges that instead of taking this course, companies in need of finance should “allow existing covenants … to operate as intended” and that a better way of increasing debt capacity would be through waivers to existing terms from current creditors.

“You have to look at the spirit in which provisions were drawn up,” Sabrina Fox, executive advisor at ELFA, told Private Debt Investor. “Was this [EBITDAC] in people’s minds at the time? Companies will be better served taking a constructive approach with stakeholders, rather than looking to stretch interpretations of provisions in this way, as it will make coming to investors for consents or waivers down the line much easier.”