What are Leverage Limits?
In 2013 the Federal Reserve issued guidelines for leveraged lending – specifically for buyouts, acquisitions, and capital distribution. They identified a series of ‘red flags’ which effectively have put a ceiling on most leveraged lending. The most important for LBO modeling are:
- Leverage should not be more than 6x EBITDA – leverage includes any unused facilities/debt baskets/accordion facilities.
- 50% of the structure should be repaid within approximately 5 to 7 years.
- EBITDA cleaning earning adjustments (quality of earnings reports) are not supported by third-party due diligence.
- While some deals can still be executed outside these guidelines they will attract a significant amount more due diligence and risk management assessment.