Debt Capacity Sizer
What is Debt Capacity?
In the world of Leveraged Finance (LevFin) and Private Equity, debt is the fuel that makes deals happen. But a company can’t just borrow infinite money. Debt capacity is the maximum amount of debt a company can comfortably take on without going bankrupt from the interest payments.
Think of it like applying for a mortgage. The bank doesn’t care how much you want to borrow; they care about how much cash you generate every month to cover the interest. In corporate finance, bankers look at a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) as the proxy for cash flow to figure out exactly how large of a loan the business can support.
The Role of EBITDA and DSCR
When a Managing Director walks over to your desk and asks, “What kind of leverage can this asset support in today’s market?”, they want a fast answer. To give them one, you need two metrics:
- EBITDA: How much cash the business prints.
- DSCR (Debt Service Coverage Ratio): The safety cushion. A DSCR of 1.5x means the company generates $1.50 of cash for every $1.00 of interest it owes.
By dividing the EBITDA by the target DSCR, you find the maximum interest burden the company is allowed to have. Divide that by the current interest rates, and you have your total debt capacity.
How Bankers Use This Sizer
This calculator is the ultimate “back-of-the-envelope” tool for live deal discussions. You don’t need a 50-tab LBO model to get a gut-check on leverage. Just plug in the LTM (Last Twelve Months) EBITDA, an assumed interest rate (like SOFR + 400 basis points), and the lender’s required DSCR. The tool spits out the total dollar amount of debt the company can hold, and instantly converts it into an Implied Leverage Multiple (e.g., 4.5x EBITDA). It’s perfect for scoping out sponsor-backed deals before you dive into the heavy Excel work.
Frequently Asked Questions (FAQ)
1. What is a good DSCR (Debt Service Coverage Ratio)?
Lenders typically look for a DSCR of at least 1.25x to 1.50x. Anything below 1.0x means the company doesn’t generate enough cash to pay its interest obligations, which is a massive red flag.
2. Why use EBITDA instead of Net Income?
EBITDA is a proxy for operating cash flow. Net income includes non-cash expenses (like depreciation) and existing interest/taxes, which muddies the picture when you are trying to figure out how much new debt the core business can support.
3. What does “Implied Leverage Multiple” mean?
It’s a shorthand way to express total debt relative to company size. If a company has $10M in EBITDA and $40M in debt, the leverage multiple is 4.0x. PE firms and lenders use this shorthand constantly.
4. Does this calculator account for principal amortization?
This specific quick-sizer focuses on interest coverage (interest burden). For a deeper analysis including mandatory principal repayments, you would need a full Fixed Charge Coverage Ratio (FCCR) model.
5. How do interest rates affect debt capacity?
They have an inverse relationship. When interest rates rise, the cost of borrowing goes up, meaning the same amount of EBITDA can support less total debt.