--- title: "Interest Coverage Ratio (ICR) | Altss Glossary" description: "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…" canonical: "https://altss.com/glossary/interest-coverage-ratio" --- 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](https://altss.com/glossary/pik-payment-in-kind). 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](https://altss.com/glossary/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](https://altss.com/glossary/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](https://altss.com/glossary/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)](https://altss.com/glossary/dscr-debt-service-coverage-ratio): 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)](https://altss.com/glossary/debt-to-ebitda): 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](https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-characteristics-and-risks-20240223.html). 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](https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/ch2.pdf). 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 ## Related terms 6 terms - [Debt Service Coverage Ratio (DSCR)](https://altss.com/glossary/dscr-debt-service-coverage-ratio) - [Debt-to-EBITDA (Leverage Multiple)](https://altss.com/glossary/debt-to-ebitda) - [Maintenance Covenant](https://altss.com/glossary/maintenance-covenant) - [Secured Overnight Financing Rate](https://altss.com/glossary/sofr-secured-overnight-financing-rate) - [Payment-in-Kind (PIK)](https://altss.com/glossary/pik-payment-in-kind) - [Loan Covenants](https://altss.com/glossary/covenant-package) ## Referenced by 1 term - [Leveraged Buyout (LBO)](https://altss.com/glossary/leveraged-buyout) ## 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](https://altss.com/reference/concepts/interest-coverage-ratio.json) ## Canonical URL https://altss.com/glossary/interest-coverage-ratio