Ratio Debt
Ratio Debt is additional indebtedness that a credit agreement permits a borrower or Restricted Subsidiary to incur when specified pro forma leverage, coverage or similar financial tests are satisfied.
Ratio Debt expands beyond fixed baskets
Fixed baskets provide a known dollar amount of debt capacity. Ratio Debt adds another lane tied to financial performance.
As EBITDA grows or debt falls, the borrower can create additional borrowing capacity without amending the agreement.
Different debt priorities can use different ratios
Current 2026 agreements distinguish secured and unsecured Ratio Debt and apply different leverage thresholds.
A borrower may therefore have less capacity for first-priority secured debt than for unsecured debt.
The test is pro forma
The calculation can include acquired EBITDA, new debt, debt repayment and other permitted adjustments as though the transaction had already occurred.
That makes Ratio Debt directly dependent on the agreement’s pro forma and EBITDA definitions.
More restrictive maintenance covenants can flow back
Some current agreements provide that if Ratio Debt contains financial maintenance covenants more restrictive than the existing facility, existing lenders receive the benefit of those covenants.
This protects the original lender group from being left with weaker maintenance protection.
Ratio Debt can expand rapidly when EBITDA rises
Assume a borrower has $300 million of debt and $100 million of covenant EBITDA. A 3.5× total leverage test permits about $50 million of additional debt before reaching $350 million.
If EBITDA later rises to $130 million, the same 3.5× test supports up to $455 million of total debt, creating roughly $155 million of capacity above the original $300 million balance.
That growth occurs without increasing any fixed basket.
The example shows why ratio debt is often more powerful than a stated dollar exception for a growing borrower—and why lenders focus closely on the EBITDA definition used in the pro forma test.
Common mistakes
Treating Ratio Debt as a maintenance covenant It is generally tested when new debt is incurred.
Assuming the amount is fixed Capacity changes with ratios.
Ignoring EBITDA adjustments They can materially increase the amount of debt that passes the test.
Example
A credit agreement permits secured Ratio Debt if pro forma leverage does not exceed 3.00× and unsecured Ratio Debt if leverage does not exceed 3.50×. A borrower at 2.80× may be able to add secured debt until the pro forma calculation reaches the 3.00× limit.
Example
A credit agreement permits secured Ratio Debt if pro forma leverage does not exceed 3.00× and unsecured Ratio Debt if leverage does not exceed 3.50×. A borrower at 2.80× may be able to add secured debt until the pro forma calculation reaches the 3.00× limit.
Professional note
Ratio Debt capacity can be much larger than a fixed debt basket when EBITDA is strong. Test the pro forma EBITDA definition, debt netting rules, lien priority, maturity constraints and whether contemporaneous fixed-basket debt is ignored in the ratio calculation.
Related terms
- Incurrence Covenant
An incurrence covenant is a credit-agreement restriction that is tested when a borrower proposes to take a specified action—such as incurring debt, making an investment, granting a lien or paying a restricted payment—rather than automatically on every recurring reporting date.
- Incremental Facility
An incremental facility is additional term-loan or revolving-credit capacity that a borrower can add under an existing credit agreement, subject to the agreement’s specified limits, lender participation and conditions.
- EBITDA Add-Back
An EBITDA add-back is an adjustment permitted by a credit agreement that increases covenant or adjusted EBITDA by reversing specified expenses, losses or charges or by including certain expected cost savings, synergies or other contractually allowed amounts.
- Pro Forma Adjustment
A pro forma adjustment in a credit agreement is a contractual change to historical financial results used to calculate ratios or baskets as though specified acquisitions, dispositions, financings, cost savings or operating changes had occurred earlier in the measurement period.
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