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Elevated EBITDA Addbacks Continue: S&P Global Ratings

November 25, 2020, 09:10 AM
Filed Under: Industry News
Related: S&P Global

A review of a large sample of M&A and LBO transactions originated between 2015 and 2019 shows that overall, addbacks inflated marketing EBITDA by an average of over 28% and accounted for 54% of reported last-12-months EBITDA at deal inception. The review was conducted by S&P Global Ratings  confirmed that it is increasingly clear that marketing EBITDA (including addbacks) generally does not provide a realistic indication of future EBITDA  and companies also consistently overestimate debt repayment.

Together, these effects meaningfully understate actual future leverage and credit risk.

They also contribute to incremental event risk, as many covenant baskets are tied to EBITDA.

On average, actual reported net leverage was 2.8 turns higher than forecast for 2018 and 3.3 turns than in 2019.

Overestimated earnings were the primary contributor to the leverage disparity, with reported EBITDA coming in at 27% below marketing EBITDA in 2018 and below 30% in 2019.
Our data show a stark contrast in projection performance for sponsored and nonsponsored transactions, with nonsponsored deals vastly outperforming the former.

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