Glossary · Underwriting metric

Interest Coverage Ratio (ICR)

Also called: times interest earned

The interest coverage ratio (ICR) is the ratio of a borrower's earnings to its interest expense, typically EBITDA or earnings before interest and taxes (EBIT) over twelve months; lenders use it to size debt and as a financial covenant.

Publisher: Altss LLCContent modified 2026-10-01

ALTSS-CREDIT-044

An ICR of 2.0x means the borrower earns twice what it owes in interest. The lower the ratio, the less room the company has to absorb a fall in earnings or a rise in interest rates before it cannot pay its lenders in cash. For floating-rate private loans, the ratio moves with the base rate even when the business does not change.

Formula

Interest coverage

ICR = earnings measure / interest expense, both over the same period

E: EBITDA (leveraged finance), EBIT ("times interest earned"), or EBITDA minus capex, as defined in the credit agreement
I: interest expense: usually cash interest; some definitions include PIK interest, others exclude it

With EBITDA in the numerator, ICR = 1 / (leverage × average cost of debt). At 5.0x leverage and a 10.05% coupon, ICR is about 1.99x. The ratio can be measured on trailing interest or on run-rate interest at the current base rate, and the second matters after a rate rise.

Conventions

Numerator. EBITDA is standard in leveraged and private credit. EBIT gives the stricter "times interest earned" measure used in corporate finance and ratings. Some agreements deduct capex.
Denominator. Cash interest only, or cash plus PIK. Gross or net of interest income. Including or excluding fees and the cost of hedging.
Period. Last twelve months, or pro forma for acquisitions and current debt.

Two coverage ratios are comparable only when numerator, denominator and period are defined the same way.

Why floating rates make coverage the binding risk

Most private loans pay a floating rate, in US dollars usually a term rate derived from the Secured Overnight Financing Rate (SOFR), so a rise in the base rate passes straight into interest cost. Leverage, measured by debt-to-EBITDA, does not change when rates rise; coverage does. The identity ICR = 1 / (leverage × cost of debt) shows why a 5.5x-levered borrower that was comfortable at a 7% all-in coupon may be near 1.5x coverage at 12%. Lenders and LPs therefore stress-test coverage at higher base rates, and borrowers buy interest-rate hedges for part of the debt.

How lenders use it

Underwriting. A minimum coverage at the expected or stressed base rate, alongside a leverage limit.
Covenants. A minimum ICR as a maintenance covenant, more common in middle-market and bank loans. Incurrence-style ratio tests also apply in bonds.
Monitoring. The trend in coverage, and the gap between cash and total interest. A borrower that has elected to pay interest in kind can show improving cash coverage while its debt grows.

How LPs use it

For a private credit portfolio, LPs ask for weighted-average interest coverage and its distribution, especially the share of borrowers near or below 1.0x, where interest is no longer covered by EBITDA. Rising non-accruals and PIK usage usually follow falling coverage. Coverage data is only comparable across managers if EBITDA and interest are defined the same way.

Worked examples

Illustrative coverage at the current base rate

A borrower has $50m of EBITDA and a $250m unitranche loan at Term SOFR + 5.75%. A 4.30% SOFR fixing gives a 10.05% coupon and $25.125m of annual interest. ICR is 1.99x.

The same company after a 200 bp rise in SOFR

Nothing changes in the business, but the coupon rises to 12.05% and interest to $30.125m. ICR falls to 1.66x. Coverage fell by about a sixth because of the base rate alone.

Examples are illustrative; figures are not market data.

Not the same as

Debt Service Coverage Ratio (DSCR): The debt service coverage ratio (DSCR) includes scheduled principal in the denominator. ICR covers interest only.
Fixed Charge Coverage Ratio: The fixed charge coverage ratio (FCCR) deducts capex and taxes from earnings and adds principal and other fixed charges to the denominator, so it is stricter than ICR.
Debt-to-EBITDA (Leverage Multiple): Leverage measures debt size. ICR measures the affordability of its interest, which also depends on rates.

Common mistakes

Comparing EBITDA-based and EBIT-based coverage ratios.
Reading improving cash coverage as improving credit when interest has been switched to PIK.
Using trailing interest after a rate rise, which overstates coverage until the higher rate has applied for a full year.

Edge cases

A borrower that is fully hedged with an interest-rate swap or cap has coverage that depends on the hedge terms and maturity, not just the base rate.
For borrowers with negative EBITDA, the ratio is meaningless. Lenders use liquidity or recurring-revenue tests instead.

Sources

Private Credit: Characteristics and Risks. Fang Cai; Sharjil Haque, Board of Governors of the Federal Reserve System (FEDS Notes), 23 February 2024. Status: Published (checked 2026-10-01). Characteristics section — supports: Private credit loans are mostly floating rate; borrower leverage is a key risk
Global Financial Stability Report, April 2024, Chapter 2: The Rise and Risks of Private Credit. IMF staff (team led by Caio Ferreira and Nobuyasu Sugimoto), International Monetary Fund, April 2024 GFSR ("The Last Mile"), published 16 April 2024. Status: Published (checked 2026-10-01). Chapter 2, executive summary — supports: Private credit is typically floating rate and lends to relatively small, highly leveraged borrowers that could face rising financing costs

6 terms

1 term

Leveraged Buyout (LBO)

Concept record

Concept ID: ALTSS-CREDIT-044
Classification: Underwriting metric
Topics: Private credit
Version: 2.0.0
Last reviewed: 2026-10-01
Structured data: JSON