Question

Which one of the following statements is correct?

Covenants
Debt / EBITDA	< 5.0x
Interest cover (EBITDA /total interest expense)	> 3.0x
Balance sheet extract		Year 1	Year 2	Year 3	Year 4	Year 5
Total debt		1,090.0	1,085.0	945.0	870.0	478.0
Income statement extract		Year 1	Year 2	Year 3	Year 4	Year 5
EBITDA		242.2	241.1	185.0	250.0	260.0
Total interest expense		75.2	74.9	65.8	67.9	38.5

Select one:

Debt / EBITDA covenant is breached in year 3

Interest cover covenant is breached in year 3

Both debt / EBITDA and interest cover covenants are breached in year 3

None of the covenants are breached throughout the forecast

Answer 1

Option 3 is correct - Both debt / EBITDA and interest cover covenants are breached in year 3

Explanation:

Year 3 Debt to EBITDA = Net debt/ EBITDA

= 945/185

= 5.108

Ratio is greater than the benchmark which is breaching the covenants

Year 3 Interest cover = EBITDA/interest expense

= 185/65 or 185/66

= 2.846 or 2.80

Ratio is less than the benchmark which is breaching the covenants

Please note that Year number 3 are not clear though i took both the cases to check the answer.

If you have any issues, please post in comments.