Fixed Charge Coverage Ratio (FCCR)

Numerator variations: Base = EBITDA - Capex - Cash Taxes. Variations include: (1) Maintenance capex only (excluding growth capex), (2) Net capex (after asset sale proceeds and insurance recoveries), (3) EBITDA with or without add-backs (stock-based comp, non-recurring charges, sponsor fees), (4) Cash taxes vs book taxes vs simple % of EBITDA (often 40%), (5) Subtraction of dividends or restricted payments if applicable.

Denominator variations: Base = Interest + Scheduled Principal. Additions may include: (1) Operating lease payments (treating as debt equivalent), (2) Capital leases and finance obligations, (3) Earn-out payments if contractually obligated, (4) Pension/OPEB contributions, (5) Letter of credit fees. Some facilities exclude voluntary prepayments from denominator—only mandatory amortization counts.

Example calculation: EBITDA $25M, Maintenance Capex $5M, Cash Taxes $2M, Dividends $0. Numerator = $25M - $5M - $2M = $18M. Interest $8M, Scheduled Principal $4M, Lease Payments $2M. Denominator = $8M + $4M + $2M = $14M. FCCR = $18M / $14M = 1.29x. Passes 1.2x covenant threshold with 7.5% cushion.

Testing frequency: Most covenants test quarterly based on trailing twelve months (TTM). Some test semi-annually to reduce compliance burden. Testing dates typically align with financial reporting (45-60 days after quarter-end). Late delivery of compliance certificate itself constitutes default—separate from covenant breach.

ABL facilities: Typically 1.0-1.1x FCCR. Lenders comfortable with thin coverage because collateral provides primary protection. Some ABL facilities have 'springing FCCR' that only tests when availability falls below threshold (e.g., if availability < 20% of commitments, FCCR must exceed 1.0x). Creates dual protection—either ample collateral or positive coverage required.

Unitranche loans: 1.1-1.25x typical range. Blended risk pricing assumes moderate coverage. Tighter than ABL due to less liquid collateral but looser than senior/sub split where senior lenders demand higher coverage. Middle-market sweet spot balancing protection and feasibility.

Traditional senior secured: 1.25-1.5x for first lien, 1.5-1.75x for senior secured with second lien behind it. Senior lenders demand meaningful cushion above breakeven. Threshold accounts for economic downturns—company should cover obligations at 70-80% of normal EBITDA.

Mezzanine/subordinated: Often no FCCR covenant—or 1.0x minimum. Structural subordination and higher yields compensate for thinner coverage. Mezz lenders concerned with total leverage and interest coverage but less focused on fixed charge coverage since they lack enforcement rights versus senior lenders.

Capex timing flexibility: Companies facing tight FCCR can defer discretionary capex to next test period. Example: $10M expansion project scheduled Q4 2025 delayed to Q1 2026 improves year-end 2025 FCCR by ~0.3-0.5x. Allows passing covenant but creates operational issues—deferred maintenance eventually catches up. Lenders combat with 'minimum capex' requirements (e.g., at least 3% of revenues annually).

EBITDA add-back maximization: Credit agreements allow add-backs for 'non-recurring' or 'extraordinary' items. Companies aggressively categorize restructuring costs, acquisition integration, project delays, and one-time losses as non-recurring. $2-3M in add-backs on $25M EBITDA improves FCCR by 0.15-0.2x. Lenders limit through caps (e.g., add-backs not to exceed 20% of EBITDA) or specific category restrictions.

Principal payment manipulation: Some facilities have voluntary prepayment optionality. Companies facing FCCR pressure skip voluntary prepayments, improving denominator. Alternatively, amending loan to reduce amortization rate (from 10% to 5% annually) cuts denominator by $2-3M on $50M loan, improving FCCR 0.2x. Requires lender consent—often extracted during amendment when covenant already breached.

Equity cure rights: Many facilities allow equity contributions from sponsors to cure FCCR breaches. Sponsor injects $5M equity, which counts as EBITDA add-back in numerator improving FCCR. Cure rights limited to 2-3 uses over loan life and maximum annual amount (e.g., $10M). Creates safety valve but can't be perpetual solution—sponsor capital ultimately depletes.

Breach mechanics: Company calculates FCCR at 0.98x versus 1.10x requirement. Breach occurs automatically—no discretion. Must deliver notice to lenders within days. Lenders can (1) declare default and accelerate loan, (2) negotiate waiver (fee + interest rate increase), or (3) require amendment lowering covenant or restructuring loan terms. Decision depends on company value, collateral, and lender recovery expectations.

Waiver economics: One-time FCCR breach due to temporary EBITDA dip. Company credibly forecasts recovery. Lenders grant waiver charging 0.50-1.00% waiver fee and 0.25-0.50% interest rate increase. Example: $50M loan, 0.75% fee = $375K immediate payment plus $125-250K annual interest increase. Expensive but avoids default acceleration and potential bankruptcy.

Amendment and covenant reset: Persistent FCCR pressure requires structural amendment. Lenders agree to lower FCCR requirement from 1.25x to 1.10x (current level ~1.05x with projected recovery). Amendment fee 1-2% of commitments ($500K-$1M on $50M loan), interest rate increase 50-100 bps, and often PIK toggle or payment deferral for short period. Gives company breathing room but materially increases lender returns.

Lender enforcement considerations: Lenders evaluate: (1) Is breach temporary or structural? (2) What's recovery value if loan accelerated? (3) Can company raise equity or sell assets? (4) Are we better off amending or enforcing? Often, amending and earning extra fees/spread is optimal—enforcement leads to bankruptcy with 40-60% recovery versus amendments maintaining par value plus enhanced returns.