Glossary
Deal economics
What is leverage?
Total debt divided by EBITDA.
Debt magnifies both directions. At 4x a bad year is uncomfortable; at 6.5x the same year is a restructuring. Leverage is a volatility dial dressed up as a financing choice.
A worked example
$275m of debt against $50m of EBITDA is 5.5x leverage. If EBITDA falls 20% to $40m and the debt stays where it is, leverage jumps to about 6.9x without you borrowing another dollar.
Where it catches you in the game
- The leverage cap slider moves acceptance odds, income and breach risk together.
It comes up most on the private equity desk, the hedge fund desk and the leveraged finance desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what leverage does to your returns.