Fixed Charge Coverage Ratio

The most common formulation is: FCCR = (EBITDA − CapEx − Cash Taxes) / (Interest Expense + Mandatory Debt Repayments + Lease Payments). Some analysts use EBITDA alone in the numerator for simplicity, but the more conservative version subtracts maintenance capital expenditures and cash taxes because those are non-discretionary cash outflows that reduce the funds available for debt service. The denominator captures all fixed charges: interest on all debt facilities, required amortization payments on term loans, operating and finance lease obligations, and preferred stock dividends. An FCCR above 1.0x means the company can cover its fixed charges; below 1.0x means it cannot and may need to draw on revolving credit facilities or raise capital.

Lenders in leveraged buyouts and other leveraged financings routinely include FCCR as a maintenance covenant in credit agreements. A typical covenant might require FCCR of at least 1.10x, tested quarterly on an LTM basis. Breaching the covenant constitutes an event of default, which gives lenders the right to accelerate repayment or renegotiate terms. The covenant level is negotiated during deal syndication — sponsors push for lower thresholds (more cushion), while lenders push for higher thresholds (more protection). In a credit analysis, bankers project FCCR across the forecast period to ensure the company maintains adequate headroom above the covenant level even in downside scenarios.

The interest coverage ratio (EBITDA / Interest Expense) only measures the ability to pay interest, ignoring principal repayments and other fixed charges. This makes it an incomplete measure of debt service capacity, particularly for companies with significant amortizing debt. FCCR is more comprehensive and more conservative because it includes all fixed obligations. In practice, both ratios are used: interest coverage for quick comparisons and FCCR for detailed credit analysis. For companies with minimal amortization and no preferred dividends, the two ratios will be similar. For companies with large mandatory repayments — such as LBO targets with term loan amortization — FCCR can be significantly lower than interest coverage and is the more relevant metric for assessing financial risk.

In a leveraged buyout model, the FCCR is one of the key credit metrics tracked across the projection period. At the time of the transaction, the FCCR may be tight (1.1-1.3x) due to the heavy debt load, but it should improve over time as EBITDA grows and debt is paid down. Bankers and lenders stress-test the FCCR under downside scenarios — revenue declines of 10-20%, margin compression, and delayed synergy realization — to ensure the company can withstand economic headwinds without breaching covenants. If the FCCR drops below 1.0x in any scenario, the deal's leverage may need to be reduced or the debt terms restructured. Private equity sponsors also monitor FCCR post-acquisition to manage debt paydown strategy and identify when refinancing is appropriate.