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EBITDAC: A somewhat dubious term

It first became common parlance in a viral Tweet but is now starting to creep into the balance sheets of companies across Europe. EBITDAC has been described as a “generously redefined version of ex-COVID EBITDA” and it’s dangerous for debt calculations.

Blackrock-owned German manufacturing group Schenck Process added an extra €5.4m to its Q1 profits, saying that it would have made that money if it weren’t for lockdowns. One commentator described it as “literally a fiction”, adding that these revenues would never come back.

Investors have already started to look at how EBITDA multiples post-COVID might change and the market has been expecting a correction for a while in areas like dentistry. Panellists on this week’s HBI 2020 digital webinar on the investment landscape during the coronavirus agreed that it’s not the multiple they expect to change but how EBITDA will be measured itself.

Rothchild’s Hedley Goldberg said that by Q4 private equity groups will be under a huge amount of pressure to do deals and many will steer clear of more consumer-led markets like retail and leisure, keeping multiples in the health sector high. Luke Savage of MPT agreed but said that the challenge will be whether the M&A market waits for a normalisation of EBITDA, which might not happen until Q1/2 2021 or whether buyers are happy to accept adjusted figures. Once buyer and seller have agreed on the EBITDA(C) then the multiple shouldn’t delve too far from a pre-COVID world. Goldberg reckons M&A is likely to restart in the autumn of 2020 as PE buyers itch to spend dry powder.

The adjustment looks to be more serious in gearing assessment, with investors warning against its use. “We believe that calculating debt capacity using EBITDAC is inappropriate, as it would allow companies to incur indebtedness, including debt that primes existing investors, against backward-looking metrics stripped of the effects of the pandemic only to wind up with more leverage against an uncertain post-COVID level of forward earnings and cash flow,” said European Leveraged Finance Association (ELFA), a representative group for investors in high-risk loans and bonds.

“It is by no means guaranteed that EBITDAC reflects forward-looking operating trends, and as such it should not be relied on as a calculation metric for any purpose under debt documents.”

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