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As with most questions regarding debt and debt ratio, it depends on the company. A company with high degree of recurring revenue, sticky customers and/or long contracts will have the capability to lever up far more than a one-trick pony from Silicon Valley.
As a rule of thumb though, anything above 5xEBITDA is usually considered too much from the bank's perspective, which means you would have to find other (more expensive) sources of funding.
Another good rule of thumb to compliment "the Jefferies fallacy" above - debt should be capped at 50% of total capital (especially with today's lending climate).
Mind elaborating what this fallacy is and its origins mate? SB'd
Saw some 6-6.5x stuff this summer. Quite rare but that’s the extreme.
That’s crazy. Was it in the DACHs region? I guess negative interest rates can incentivize them to lend out more.
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I've seen 6-6.5x pretty commonly in larger cap / high quality deals. Max i've personally seen is 6.75x net; 7x gross. That was a ~2bn tev very high quality co where lenders have significant exp.
Strong FCF and cushy margins
I can’t see the dates for when these posts above me are from given I’m on mobile, but they are completely off. Anything above 5x levered considered “high” for an LBO? Please. Anyone that tells you that is living in 2010, or works exclusively on building products deals. I’ve worked on so many deals where leverage was 7x or higher, as high as 7.5x. And this is at a regulated bulge bracket bank, not a Jefferies or other unregulated lender.
The commentary on how to determine what is appropriate, however, is correct. 3x leverage could be pushing the envelope for a cyclical OEM auto parts manufacturer, but 6x for an acyclical business services name with high FCF conversion and recurring revenue model would be considered “light”.
Just to be clear the numbers you mentioned - 7x to 7.5x these were net debt / LTM EBITDA? That seems way tooo high
Not for well-managed SaaS companies with 95%+ gross retention with extremely high switching costs offering a "mission critical" solution. Those companies actually do tend to get 7.0x net debt and nosebleed valuations. Not uncommon at all. It is rarer outside of that industry though.
What are the EV / EBITDA multiples of these businesses? I imagine they'd be over 14x so the 7x debt multiple is still within a 50% capital threshold
$10MM EBITDA we won't go over 3x Senior Funded Debt/EBITDA and 4x Total Funded Debt. FCCR is usually between 1.10x-1.25x
'>$60MM EBITDA we will go up to 5x Senior Funded and 6x Total Funded Debt. FCCR likely 1.10x-1.15x.
In general, the larger the Company's revenue/EBITDA, the more comfortable we are lending at the higher leverage ranges. As others mentioned, industry matters a lot.
PE firms are usually pretty good at negotiating add-backs to EBITDA in the Credit Agreement which helps the ratios.
Great stuff mate. SB'd
Just curious though, what type of role are you in that allows you to look at deals across such a wide range of sizes? Appreciate your label suggests commercial banking, but would be nice if you could elaborate a little.
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