Debt-to-EBITDA (Leverage Multiple)

Formula

Conventions that change the number

• Gross vs net. Net leverage deducts cash. Documents often cap the cash that can be netted or require it to be unrestricted.
• Which debt. Total, senior secured, or first-lien. Does it include payment-in-kind (PIK) notes at holding-company level, finance leases, earn-outs or drawn revolvers?
• Which EBITDA. Reported vs adjusted EBITDA; last twelve months vs annualised run-rate; pro forma for acquisitions, including the target's pre-acquisition EBITDA and expected synergies.
• Timing. Leverage at closing vs at each quarterly test date.

Each choice can change the reported multiple for the same business; in the third example above, one add-back alone moves it by half a turn.

How lenders use leverage

• Sizing: maximum leverage at entry.
• Maintenance covenants: a maximum total or senior net leverage tested quarterly, often stepping down over time.
• Incurrence tests: leverage limits that apply only when the borrower takes on more debt, pays dividends or makes acquisitions.
• Pricing grids: margins that step down as leverage falls.

Lenders also read leverage through their own tranche: a second-lien lender's position runs from first-lien leverage to total leverage.

How LPs read portfolio leverage

Weighted-average leverage across a direct-lending portfolio, and its trend, is a common diligence item in market practice. Check:

• the EBITDA definition behind the number;
• whether it is measured at entry or currently;
• how borrowers with negative or near-zero EBITDA are treated, since they are often excluded or measured on revenue instead (see recurring revenue lending).

Leverage alone says nothing about the interest burden, so read it with interest coverage, especially when base rates have risen.

Worked examples

Examples are illustrative; figures are not market data.

Not the same as

• Leverage: Leverage in the risk sense is any use of borrowed money to amplify exposure, including at fund level. Debt-to-EBITDA is one specific measure of a company's leverage.
• Interest Coverage Ratio (ICR): Interest coverage measures the ability to pay interest. Leverage measures the size of the debt relative to earnings.
• EV/EBITDA Multiple: The enterprise value (EV) to EBITDA multiple values the business; debt-to-EBITDA measures its leverage, and dividing the second by the first gives the loan-to-value through the debt.

Common mistakes

• Comparing leverage across lenders or managers without aligning EBITDA definitions and add-backs.
• Netting all balance-sheet cash, including trapped or restricted cash.
• Ignoring PIK accrual and drawn revolvers, both of which raise debt between test dates.
• Reading falling leverage as deleveraging when it comes from EBITDA adjustments or acquisitions measured pro forma.

Edge cases

• For companies with negative EBITDA the ratio is meaningless. Lenders switch to revenue-based measures such as debt to annual recurring revenue.
• An acquisition financed with debt can lower pro forma leverage if the acquired EBITDA, including projected synergies, is large enough, even though total debt rose.

Sources

1. Comptroller's Handbook: Leveraged Lending. Office of the Comptroller of the Currency (OCC), February 2008 (reputation-risk references struck through as of 2025-03-20 under OCC Bulletin 2025-4). Status: published booklet (not rescinded) (checked 2026-10-01). p. 2; glossary pp. 59-60, 62 — supports: Total debt/EBITDA and senior debt/EBITDA are the operating leverage ratios used to identify leveraged loans; covenant headroom compares projected debt/EBITDA with the covenant level; EBITDA measures profitability, not cash flow; incurrence covenants test leverage pro forma only when the borrower acts
2. Concentration of Control Rights in Leveraged Loan Syndicates. Mitchell Berlin; Greg Nini; Edison G. Yu, Federal Reserve Bank of Philadelphia (Working Paper 19-41), WP 19-41, October 2019. Status: published working paper (checked 2026-10-01). p. 10 (incl. nn. 23-24) — supports: Leverage and senior leverage ratios are among the most common financial maintenance covenants, typically tested quarterly on a contractually defined EBITDA that often differs from GAAP EBITDA
3. Weak Credit Covenants. Victoria Ivashina; Boris Vallee, National Bureau of Economic Research (Working Paper 27316), NBER WP 27316, June 2020. Status: working paper; published version listed by NBER as Management Science 71(12), 9998-10021 (2025), not opened (checked 2026-10-01). p. 16 and n. 17 — supports: Debt incurrence is typically restricted through a maximum Debt/EBITDA ratio; credit-agreement EBITDA follows a contractual definition that can add back items such as pro forma cost savings (on average twelve modifications to the standard definition)

• Interest Coverage Ratio (ICR)
• Maintenance Covenant
• Leverage

• Debt Yield
• EV/EBITDA Multiple
• Leveraged Buyout (LBO)
• Quality of Earnings (QoE)