A Practitioner’s Guide to One Borrower, Four EBITDAs, and the Number That Decides Whether the Loan Is Repaid
Julian R. Sterling
These are the four Excel workbooks that go with the book. Every figure the book prints is
reproduced in them by a live formula rather than a typed constant — switch an add-back off,
disallow a different amount, move the covenant level or the exit multiple, and every dependent
number moves. Each one ends with a Checks sheet setting the printed figure
beside the computed one: 87 controls in all, every one green. If a control ever
reads FAIL, the workbook is wrong, not the book.
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Everything described below is inside it, with the read-me.
The four workbooks
Chapters 1, 5, 6 and 8
Halstead — the four EBITDAs
The add-back bridge with a switch on every line. Six adjustments from
management — restructuring described as non-recurring, run-rate savings from a closed
plant, the full-year effect of an acquisition, sponsor fees, share-based payment, foreign
exchange — and the four quality-of-earnings haircuts that answer them, each one a cell
you turn on or off. The four leverage ratios recompute as you do:
4.8780x statutory, 3.1915x on management's number,
4.2164x on the lender's, 6.4655x on cash.
The spread of 3.2740 turns is a formula, and so is its decomposition: 1.6866
turns of add-back argument, 1.0250 taken back by the review, 2.2491 that nobody argued about
because leverage is not measured on cash. Set the add-backs against the covenant headroom of
0.0336 of a turn and the ratio the book is named for —
fifty to one — is a single cell.
The_Four_EBITDAs.xlsx · XLSX · 12 KB
Chapters 9, 10 and 11
The covenant test
Both tests on your own levels rather than the book's. Debt service of
14,880,000 against cash available of 18,560,000, a cover of
1.2473x on a 1.20x test, and leverage of 4.2164x on a 4.25x test. Two
covenants, both held, and one of them a rounding error from breach.
Then the question that decides which one you monitor. The leverage test breaks on a fall in
EBITDA of 0.7895 per cent; the cover test breaks on a fall in cash of
3.7931 per cent. Leverage binds, by a factor of nearly five, and it binds
because it is measured on the quantity that carries the adjustments. Change either level and
watch the binding test change hands.
The_Covenant_Test.xlsx · XLSX · 12 KB
Chapters 12, 13 and 14
The downside and the recovery
A downside case that stops at EBITDA has done a third of the job. Eight per cent off revenue
becomes 17.6 per cent off EBITDA through operating leverage, and
26.9879 per cent off cash once the maintenance capital expenditure and the
cash tax that do not shrink are taken out — an amplification of
3.3735 times, shown in both of its stages. Leverage goes to 5.1170x and
cover to 0.9107x: both covenants broken on a revenue fall a board would call
a soft year.
The recovery is then computed where defaults actually happen, on the downside EBITDA rather
than on the number the loan was sized against. Seven exit multiples, enforcement costs, and
the multiple solved for: the lender needs 5.4437x in default to be repaid in
full, having lent at 4.2164x and having been shown 3.1915x. The gap of
1.2272 turns is the credit decision, and it is the line the paper leaves out.
The_Downside_and_the_Recovery.xlsx · XLSX · 13 KB
Chapters 15 and 18
Pricing and the amendment
A margin is a number until it is set against an expected loss. Recovery
73.4799 per cent, loss given default 26.5201, an assumed default probability
of 4.0000 and an expected loss of 1.0608 per cent — which consumes
26.5201 per cent of a 4.0000 per cent margin and leaves 2.9392. Then the same computation run
backwards: the default probability at which the whole margin is gone is
15.0829 per cent at a 4.0x exit, and 8.9107 at 3.0x. Half a
turn of exit multiple moves the answer more than any plausible revision to the default rate.
And the amendment, priced properly. A reset from 4.25x to 5.25x buys tolerance for a
19.6868 per cent fall in EBITDA instead of 0.7895, at a fee of 1,200,000 and
a ratchet of 600,000 a year — 3,600,000 as the letter reads,
3,420,000 as it is actually collected on an amortising balance. It costs
0.1646 of a turn of cover against 0.0473 of cover headroom, so the amendment
breaks the covenant nobody reset. The workbook also prices the branch the fee is beside the
point in: a year of forbearance costs 15,518,960.23 of recovery.
Pricing_and_the_Amendment.xlsx · XLSX · 18 KB
Conventions used throughout
Blue text
a hardcoded input — you may edit these
Yellow fill
an input cell; everything else on the sheet is a formula
Black text
a formula — do not overtype these
Checks sheet
the printed figure beside the computed one, with a PASS or a FAIL
Why the checks matter more than the models
A workbook that agrees with a book proves nothing on its own — the author wrote both. What
the Checks sheets do is different: they force the model to reproduce a number that was printed
before the model existed, from a formula rather than from the number itself.
On this book the discipline caught two things a reading would not. The first was a label: three
rows of the bridge begin with an equals sign, and a spreadsheet reads that as a formula rather
than as text, so three cells rendered an error in every workbook. Nothing depended on them and no
figure was wrong, which is exactly why nobody would have noticed. The second was a ratio the book
described as a multiple of the amendment fee when it was computed on the whole package —
4.3108 times the 3,600,000, and 12.9325 times the 1,200,000 fee alone. The book
now says both, because both are true and only one was written down.
Where a shortcut and the full computation disagree, both are shown. Expected loss is
1.0608 per cent on day-one exposure and 0.6271 averaged over
the amortising balance — a gap of more than a tenth of the whole margin, and neither figure
is wrong. The amendment costs 0.1646 of a turn of cover charging the ratchet twice, and 0.1259
charging it once. Neither gap is smoothed away.
Opening the files
The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. They use
no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks
to update links on opening, decline — there are none.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.