What is the fixed charge coverage ratio formula?

FCCR = (EBITDA minus capital expenditures minus cash taxes) divided by (cash interest expense plus mandatory debt repayment). Some agreements also subtract dividends and distributions from the numerator and add scheduled lease payments to the denominator. The definition in the credit agreement governs.

What goes in the fixed charge coverage ratio numerator?

Consolidated EBITDA as defined in the agreement, less unfinanced capital expenditures, less cash taxes paid, and in many agreements less restricted payments such as dividends and distributions to owners. The numerator is meant to be the cash left over for lenders after the business has funded itself and paid the government.

What counts as a fixed charge?

Cash interest expense and scheduled or mandatory principal repayments on funded debt. Definitions often add scheduled principal on capital leases, and some add rent under operating leases, which is the version sometimes called the fixed charge coverage ratio in retail credit analysis. Prepayments and cash sweeps are not fixed charges; only the scheduled amounts are.

What is a good fixed charge coverage ratio?

Above 1.0x means the company covers its fixed charges from operating cash; below it the company is funding interest or amortization from cash on hand or new borrowing. Cash-flow loans typically set a minimum of 1.1x to 1.25x; asset-based facilities commonly use 1.0x to 1.1x as a springing test. Healthy borrowers run 1.5x to 3.0x.

What is a springing FCCR covenant?

A minimum FCCR that is tested only when a trigger occurs, most often when excess availability under an asset-based revolver falls below a threshold such as 10 to 12.5 percent of the borrowing base or the commitments. Until then the covenant is dormant. Once sprung, it is tested monthly on a trailing twelve-month basis until availability recovers for a set period.

How does a dividend recapitalization affect the FCCR?

Twice. The new debt raises cash interest and mandatory amortization in the denominator, and if the agreement deducts restricted payments from the numerator, the dividend itself reduces the numerator in the year it is paid. A recap that leaves the ratio near its covenant minimum is the classic way a healthy company becomes a tight credit without any change in its business.

How is FCCR different from the interest coverage ratio and DSCR?

Interest coverage divides EBITDA (or EBIT) by interest alone and ignores principal. DSCR, used mainly in real estate, divides net operating income by debt service. FCCR is the strictest of the three for a corporate borrower: it subtracts capex and taxes from the numerator and adds scheduled principal to the denominator.

Fixed Charge Coverage Ratio (FCCR)

Private Credit & Direct Lending

Definition

The fixed charge coverage ratio (FCCR) measures how many times a company's cash earnings cover the payments it cannot skip. The standard formula is EBITDA minus capital expenditures minus cash taxes, divided by cash interest plus mandatory debt repayment: the numerator is the cash the business generates after reinvesting and paying tax, the denominator is the fixed charges owed to lenders. A ratio of 1.0x means the company earned exactly enough to cover its interest and scheduled principal; credit agreements typically require 1.1x to 1.25x, and asset-based lenders test it only when availability runs low. It is the covenant that asks whether the company can pay its debts from operations without borrowing more.

Why it matters

FCCR is the covenant closest to the question a lender actually cares about: after the business spends what it must to keep operating and pays its taxes, is there enough cash to pay us? Leverage ratios look at the stock of debt; interest coverage ignores principal; FCCR counts every scheduled dollar out. That makes it the covenant most likely to bind first in a slowdown, the one asset-based lenders reserve as their tripwire, and the one a dividend recapitalization squeezes hardest. For an investor reading a private credit fund's holdings, a borrower's FCCR cushion, the distance between its ratio and the covenant minimum, is the most direct measure of how much earnings can fall before the lender is back at the table.

Common misconceptions

•There is no single FCCR. The numerator and denominator are defined deal by deal. Two agreements can produce ratios a full turn apart for the same company depending on whether dividends are deducted, whether leases count as fixed charges, and which EBITDA add-backs are allowed.
•Capex in the numerator usually means unfinanced capex. Purchases funded with new debt or capital leases are excluded from the deduction, because the debt that financed them shows up in the denominator instead.
•Prepayments and excess cash flow sweeps are not fixed charges. The denominator uses scheduled or mandatory principal only; voluntary or sweep repayments do not count against the ratio, which is why a borrower can make large repayments and still show a high FCCR.
•A ratio above 1.0x does not mean the company is generating free cash flow. The numerator deducts capex and taxes but not working capital investment, so a growing business can show an FCCR above 1.0x while burning cash.

Technical details

The formula and its variants

Standard corporate form: FCCR = (EBITDA minus unfinanced capital expenditures minus cash taxes) divided by (cash interest expense plus scheduled principal repayments).

With restricted payments: numerator additionally deducts dividends, distributions and other restricted payments made in the period. Common in sponsor deals and in asset-based facilities where owner distributions are a leakage risk.

With leases: denominator adds scheduled principal on finance leases and, in some agreements, rent under operating leases; the numerator then often uses EBITDAR (EBITDA before rent) so rent is not counted twice.

Asset-based lending form: (EBITDA minus unfinanced capex minus cash taxes minus distributions) divided by (cash interest plus scheduled principal), tested on a trailing twelve months, springing when excess availability falls below a threshold.

The LBO-model form used in most training materials: (EBITDA minus capex minus cash taxes) divided by (cash interest plus mandatory debt repayment). The words mandatory amortization, mandatory debt repayment and scheduled principal all mean the same denominator item.

Worked example with a year-3 dividend recapitalization

Year 1: EBITDA $60 million, capex $10 million, cash taxes $8 million, cash interest $18 million, mandatory amortization $3 million. Numerator 60 minus 10 minus 8 = $42 million. Denominator 18 plus 3 = $21 million. FCCR 2.00x.

Year 2: EBITDA grows to $66 million, capex $11 million, taxes $9 million; interest falls to $17 million as the term loan amortizes, amortization $3 million. Numerator $46 million, denominator $20 million, FCCR 2.30x.

Year 3, dividend recap: the sponsor adds $100 million of incremental term loan at 9 percent, with 1 percent amortization, and pays a $100 million dividend. EBITDA $70 million, capex $12 million, taxes $10 million. Interest becomes $17 million plus $9 million = $26 million; amortization $3 million plus $1 million = $4 million.

Year 3 without deducting the dividend: numerator 70 minus 12 minus 10 = $48 million, denominator $30 million, FCCR 1.60x. With the agreement deducting restricted payments: numerator $48 million minus $100 million = negative $52 million, FCCR negative, a covenant breach on the day of the dividend unless the definition excludes recap dividends funded with incremental debt, which sponsor-friendly agreements usually do.

Year 4, after the recap: EBITDA $72 million, capex $12 million, taxes $10 million, interest $25 million, amortization $4 million. Numerator $50 million, denominator $29 million, FCCR 1.72x. Against a 1.25x covenant the cushion is about 27 percent of EBITDA; against the 2.30x the company showed before the recap, the lender has given up most of its margin for error.

Typical covenant levels and testing

Cash-flow term loans and revolvers: minimum FCCR of 1.10x to 1.25x, tested quarterly on trailing twelve months, sometimes stepping up over the life of the loan.

Asset-based revolvers: minimum 1.00x to 1.10x, springing only when excess availability falls below 10 to 12.5 percent of the lesser of the borrowing base and commitments (or a fixed dollar floor), then tested monthly until availability has been above the threshold for 30 to 60 consecutive days.

Retail and restaurant credits with heavy lease burdens: a lease-adjusted FCCR using EBITDAR over interest plus rent plus principal, with minimums nearer 1.0x because rent dominates the denominator.

Cushion convention: sponsors negotiate covenant levels set 25 to 35 percent below the base case projection, so a 1.25x minimum implies the model showed about 1.7x to 1.9x.

Where the definition is decided

Consolidated EBITDA: the add-backs allowed (non-cash charges, restructuring costs, pro forma synergies, often capped at 15 to 25 percent of EBITDA) set the numerator's starting point and are the most negotiated part of the covenant.

Unfinanced capital expenditures: excludes capex funded with debt, capital leases, insurance proceeds or asset-sale proceeds reinvested.

Cash taxes: taxes actually paid in cash during the period, net of refunds, not the income statement provision.

Fixed charges: cash interest (excluding PIK interest and non-cash amortization of financing costs) plus scheduled principal payments on funded debt and finance leases, measured for the period actually paid or due.

Restricted payments: whether dividends, distributions, share repurchases and management fees to the sponsor reduce the numerator, and whether recap dividends funded with new debt are carved out.

Reading FCCR in a private credit portfolio

BDCs and private credit funds report weighted average interest coverage more often than FCCR, because interest coverage is simpler to aggregate. Where a fund reports FCCR by borrower, the distribution matters more than the average: the share of borrowers under 1.25x is the share that cannot absorb a 20 percent EBITDA decline without a covenant conversation.

A falling FCCR with stable EBITDA points to rising fixed charges: floating-rate interest after a rate increase, an amortization step-up, or a recap. A falling FCCR with rising fixed charges and a rising leverage ratio at the same time is the profile of a borrower being levered against its own cash flow.

For marketplace note investors, an FCCR in the offering materials is a snapshot at origination; the covenant level tells you how far it can fall before the lender can act, and whether the lender is the platform or a third party tells you who acts.

Frequently asked questions

What is the fixed charge coverage ratio formula?: FCCR = (EBITDA minus capital expenditures minus cash taxes) divided by (cash interest expense plus mandatory debt repayment). Some agreements also subtract dividends and distributions from the numerator and add scheduled lease payments to the denominator. The definition in the credit agreement governs.
What goes in the fixed charge coverage ratio numerator?: Consolidated EBITDA as defined in the agreement, less unfinanced capital expenditures, less cash taxes paid, and in many agreements less restricted payments such as dividends and distributions to owners. The numerator is meant to be the cash left over for lenders after the business has funded itself and paid the government.
What counts as a fixed charge?: Cash interest expense and scheduled or mandatory principal repayments on funded debt. Definitions often add scheduled principal on capital leases, and some add rent under operating leases, which is the version sometimes called the fixed charge coverage ratio in retail credit analysis. Prepayments and cash sweeps are not fixed charges; only the scheduled amounts are.
What is a good fixed charge coverage ratio?: Above 1.0x means the company covers its fixed charges from operating cash; below it the company is funding interest or amortization from cash on hand or new borrowing. Cash-flow loans typically set a minimum of 1.1x to 1.25x; asset-based facilities commonly use 1.0x to 1.1x as a springing test. Healthy borrowers run 1.5x to 3.0x.
What is a springing FCCR covenant?: A minimum FCCR that is tested only when a trigger occurs, most often when excess availability under an asset-based revolver falls below a threshold such as 10 to 12.5 percent of the borrowing base or the commitments. Until then the covenant is dormant. Once sprung, it is tested monthly on a trailing twelve-month basis until availability recovers for a set period.
How does a dividend recapitalization affect the FCCR?: Twice. The new debt raises cash interest and mandatory amortization in the denominator, and if the agreement deducts restricted payments from the numerator, the dividend itself reduces the numerator in the year it is paid. A recap that leaves the ratio near its covenant minimum is the classic way a healthy company becomes a tight credit without any change in its business.
How is FCCR different from the interest coverage ratio and DSCR?: Interest coverage divides EBITDA (or EBIT) by interest alone and ignores principal. DSCR, used mainly in real estate, divides net operating income by debt service. FCCR is the strictest of the three for a corporate borrower: it subtracts capex and taxes from the numerator and adds scheduled principal to the denominator.

See in context

GuidePercent Review

Last reviewed: September 2026