PitchBook | Fixed Charge Coverage Shrinking on Midsized Companies – Lincoln

May 2023

Originally posted by PitchBook on May 9, 2023.

Rising interest rates are negatively impacting borrowers in the middle market.

Christine Tiseo, Managing Director and co-head of Lincoln’s Capital Advisory Group, commented, “There is a growing percentage of borrowers that are living paycheck to paycheck. We may see companies drawing down on revolvers to service debt, unless they are able to de-lever their balance sheet, or increase EBITDA.”

Christine’s commentary aligned with Lincoln’s Valuations & Opinions Group database which revealed that the fixed charge coverage ratio declined to 1.24x in Q4 2022 from 1.37x in Q3 2022 and 1.4x at the beginning of 2022. The decline occurred because the trailing 12-month metric absorbed a 5% base rate for approximately two quarters.

The data aligns with what Lincoln has been seeing with private equity firms and companies, particularly in transactions that closed prior to COVID-19. Borrowers are being impacted by higher interest costs in addition to other challenges such as supply chain issues and inflation.

Instead of the traditional lagging 12 months, borrowers should examine the fixed-charge coverage pro forma for the 5% base rate, or based on interest cost expectations for the next 12 months. Using that view, the fixed charge coverage ratio declined to 0.98x in Q4 2022, compared with 1.0x in Q3 2022.

The share of companies with below 1% fixed charge coverage ratios is also increasing. According to data, the share reached 21% of companies in Q4 2022 compared with 13% in Q3 2022. For data with the 5% base rate, the share reached 46% of companies in Q4 2022, an increase from 43% in Q3 2022.

Generally, $1 of free cash flow is the minimum to service $1 of debt, which leaves no margin for error or surprises. The current situation could get worse if the economic backdrop slows down.

“We have companies coming to us saying that they expect to run into a cash crunch before year end. Some are solving the problem by putting in more money. Some are getting waivers from lenders, but this is not a long-term solution,” Christine said.

In today’s difficult lending market with rising interest costs, demand for mezzanine debt demand has increased. Some borrowers are looking to structured equity, such as holding company payment-in-kind notes or preferred equity, as options; these alternatives are attractive because they usually do not require any cash interest payments.

Most of the loans that are top-of-mind for borrowers were placed in 2018 or 2019 with maturities of five to six years and are linked to a maturing revolver that would cause a first-lien loan refinancing.

Additional insights can be found in the original article.


  • Lincoln International’s Christine Tiseo shares with Pitchbook that fixed charge coverage ratios are decreasing and borrowers are navigating difficult lending conditions.

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