Credit model
Debt capacity, covenants, sweep, maturities, recovery. Size a leveraged loan from three tests and name the one that binds, run the borrower through a downside, read covenant headroom as an EBITDA cushion, and say what must be refinanced and what the lenders recover in default.
Built in: Investment banking, Private equity, Equity research and hedge funds
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: credit model.Updated 1 October 2026
Who builds it, and for whatThe model a leveraged finance banker, a direct lender or a credit fund analyst builds before a loan is offered, and the one a credit committee reads. It does not ask what the equity earns; it asks how much can be lent, whether the borrower still pays when the plan misses, how much room the covenants leave, what is still owed when each tranche matures, and what comes back if it fails. The same file is updated through the life of the loan to monitor compliance.
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| A | B | C | D | E | F | G | H | I | J | K | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | ||||||||||
| 2 | $m, fiscal years. FY0 is the year of the financing. Rates are annual. | ||||||||||
| 4 | Year | Unit | FY0 | FY1 | FY2 | FY3 | FY4 | FY5 | FY6 | Notes | |
| 5 | Timeline | ||||||||||
| 6 | Year number | # | 0 | 1 | 2 | 3 | 4 | 5 | 6 | ||
| 8 | Operating case | ||||||||||
| 9 | Scenario | # | 1 | 1 = base, 2 = downside. Applies the downside adjustments below. | |||||||
| 10 | Revenue, FY0 | $m | 400.0 | ||||||||
| 11 | EBITDA margin, FY0 | % | 20.0% | ||||||||
| 12 | Revenue growth, base case | % | 6.0% | 6.0% | 5.0% | 5.0% | 4.0% | 4.0% | |||
| 13 | EBITDA margin, base case | % | 20.5% | 21.0% | 21.0% | 21.5% | 21.5% | 21.5% | |||
| 14 | Downside adjustment to revenue growth | pp | -12.0% | -6.0% | -2.0% | 0.0% | 0.0% | 0.0% | Percentage points added to base growth when Scenario = 2 | ||
| 15 | Downside adjustment to EBITDA margin | pp | -4.0% | -4.0% | -3.0% | -2.0% | -2.0% | -2.0% | Percentage points added to base margin when Scenario = 2 | ||
| 16 | Depreciation and amortisation, % of revenue | % | 3.5% | ||||||||
| 17 | Capex, % of revenue | % | 4.0% | ||||||||
| 18 | Working capital, % of the change in revenue | % | 10.0% | ||||||||
| 19 | Tax rate | % | 25.0% | ||||||||
| 21 | Debt at close | ||||||||||
| 22 | Cash at close | $m | 20.0 | ||||||||
| 23 | Minimum operating cash | $m | 15.0 | ||||||||
| 24 | Revolver commitment | $m | 40.0 | Undrawn at close | |||||||
| 25 | Revolver interest rate | % | 6.5% | On the opening drawn balance | |||||||
| 26 | Revolver commitment fee | % | 0.4% | On the opening undrawn commitment | |||||||
| 27 | Term loan A | $m | 120.0 | ||||||||
| 28 | Term loan A interest rate | % | 6.5% | ||||||||
| 29 | Term loan A amortisation, % of original balance | % | 10.0% | 15.0% | 20.0% | 25.0% | 30.0% | 0.0% | Scheduled; fully repaid by FY5 | ||
| 30 | Term loan B | $m | 200.0 | ||||||||
| 31 | Term loan B interest rate | % | 7.5% | ||||||||
| 32 | Term loan B amortisation, % of original balance | % | 1.0% | Each year; the remaining balance is repaid at maturity | |||||||
| 33 | Term loan B maturity | year | 7 | FY1 to FY8. Balance repaid in this year; also the deleveraging test period | |||||||
| 34 | Senior unsecured notes | $m | 100.0 | ||||||||
| 35 | Senior notes coupon | % | 9.0% | ||||||||
| 36 | Senior notes maturity | year | 8 | FY1 to FY8. Bullet repaid in this year | |||||||
| 38 | Cash sweep | ||||||||||
| 39 | Cash sweep to term loan B | % | 50.0% | % of cash above the minimum after scheduled amortisation and the revolver | |||||||
| 41 | Covenant limits | ||||||||||
| 42 | Maximum total net leverage | x | 5.8x | 5.5x | 5.3x | 5.0x | 4.8x | 4.5x | Net debt / EBITDA; steps down each year | ||
| 43 | Minimum interest cover | x | 2.0x | EBITDA / cash interest | |||||||
| 44 | Minimum fixed charge cover | x | 1.1x | (EBITDA - capex - cash taxes) / (cash interest + scheduled amortisation) | |||||||
| 46 | Debt capacity tests | ||||||||||
| 47 | Leverage test: maximum total debt / FY0 EBITDA | x | 5.5x | Assumed lending limit at close | |||||||
| 48 | Coverage test: minimum FY0 EBITDA / cash interest | x | 2.3x | At the blended rate on the proposed debt | |||||||
| 49 | Deleveraging test: share of debt repaid | % | 40.0% | From unlevered free cash flow after after-tax interest | |||||||
| 50 | Deleveraging test: repayment period | years | 7 | Term loan B tenor, from its maturity | |||||||
| 52 | Refinancing and recovery | ||||||||||
| 53 | Assumed refinancing limit, debt / FY6 EBITDA | x | 4.5x | An assumption, not committed funding | |||||||
| 54 | Distressed EBITDA, % of FY0 | % | 60.0% | ||||||||
| 55 | Distressed EV / EBITDA multiple | x | 5.5x | ||||||||
| 56 | Administrative and priority claims, % of distressed EV | % | 5.0% | ||||||||
Select a cell to see its row, its schedule and the type of cell. Font colours: blue for inputs, black for formulas, green for links to other sheets. Scroll sideways to see every period.
Download
Credit model: the workbook
Excel workbook with working formulas, no macros and no external links. Work with it above first; it is the same model as the preview.
What the base case says
- Debt capacity at close
- $440.0m
- Binding capacity test
- Leverage
- Total leverage at close
- 5.3x
- Tightest EBITDA cushion, FY1
- 10.8%
- Total net leverage, FY6
- 1.4x
- Debt repaid by FY6
- 50.2%
- Refinancing surplus / (shortfall)
- $339.8m
- Secured recovery in default (estimate)
- 69.7%
Read from the workbook as served, every input at its default. Periods: FY0, FY1, FY2, FY3, FY4, FY5, FY6. The figures are invented and move with whatever you type in.
What this model is
A lender’s underwriting model for a leveraged borrower: debt capacity at close, performance in a downside scenario, covenant headroom, the maturity profile and estimated recovery in default.
Debt capacity is the lowest of three tests: maximum leverage, minimum interest cover, and a deleveraging test (repaying a set share of the debt from cash flow within the term loan B tenor). The proposed structure is a revolver, an amortising term loan A, a term loan B with a cash sweep, and senior unsecured notes.
Set Scenario on the Assumptions sheet to 2 for the downside, which lowers revenue growth and EBITDA margin in the early years. Each covenant shows its headroom as an EBITDA cushion in either scenario.
Seats: Investment banking, Private equity, Equity research and hedge funds.
Careers that do this work: investment banking, debt capital markets, restructuring, private credit, distressed & special situations, private equity.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Debt capacity
How much a borrower can borrow, and which test binds
Assumptions, rows 47–50 · Operations, rows 14–17 · Capacity, rows 5–7 · Capacity, rows 10–13 · Capacity, rows 16–20
Debt schedule
Tranches, interest, amortisation and the sweep
Assumptions, rows 22–36 · Assumptions, row 39 · Debt, rows 6–13 · Debt, rows 16–20 · Debt, rows 23–26 · Debt, rows 29–30 · Debt, rows 33–44
Covenant compliance and headroom
Leverage, interest cover, fixed charge cover, EBITDA cushion
Assumptions, rows 42–44 · Covenants, rows 6–8 · Covenants, rows 11–12 · Covenants, rows 15–17 · Covenants, rows 20–22
Maturity profile and refinancing
What falls due when, and whether it can be refinanced
Assumptions, row 53 · Maturities, rows 6–10 · Maturities, rows 13–17
Absolute priority distribution
Value paid out by seniority, collateral first
Assumptions, rows 54–56 · Recovery, rows 5–8 · Recovery, rows 11–17
What you should be able to explain
- How debt capacity is set by a leverage test, a coverage test and a deleveraging test, and why lenders lend against the smallest answer.
- Why this model charges interest on opening balances, and what that does to circularity.
- The order cash is applied each year: interest and tax, scheduled amortisation, the revolver, then the sweep.
- How to read covenant headroom as an EBITDA cushion, and why an amortising term loan A makes fixed charge cover the tightest test.
- Why refinancing risk is read from leverage at maturity against an assumed refinancing limit, and how a distressed value distributed by priority gives an estimate of loss given default.
What a reviewer looks for
- Sizing debt on a leverage multiple alone, with no test of whether cash flow can repay it.
- A downside case that changes revenue but leaves margins and working capital untouched.
- A sweep applied before scheduled amortisation, or funded by drawing the revolver.
- Covenant ratios shown without headroom, so the reader cannot tell 4.9x against 5.0x from 3.0x against 5.0x.
- Recovery calculated with the revolver undrawn, when a borrower in default has usually drawn all of it.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- Interest is charged on opening balances. This avoids circular references and slightly overstates interest while debt is falling.
- Cash taxes are charged on EBIT less cash interest. The deleveraging test and unlevered free cash flow use tax on EBIT alone. Downside adjustments to growth and margin are percentage points added to the base case.
- Cash is applied each year in this order: interest and taxes, scheduled amortisation, the revolver (drawn to hold minimum cash, repaid first from any excess), then the sweep to term loan B. Cash not swept is retained.
- Each EBITDA cushion holds that year’s debt, interest, capex and taxes constant and measures how far EBITDA alone could fall before the test is breached.
- Maturities: term loan B and the notes are repaid in their maturity years, FY1 to FY8. A maturity within FY1 to FY6 is repaid from cash and the revolver on the Debt sheet, and any amount they cannot fund shows as a funding shortfall; maturities in FY7 and FY8 form the maturity wall. The deleveraging test period follows the term loan B maturity.
- Refinancing capacity is an assumed leverage limit, not committed funding. The recovery sheet is a scenario estimate that assumes default soon after close with the revolver fully drawn.
Build it yourself
The starter workbook
The Covenants sheet has been cleared: actual net leverage against its step-down limit, interest cover, fixed charge cover, each test’s EBITDA cushion and the tightest test. Build them from the Debt and Operations sheets, then set Scenario on the Assumptions sheet to 2 and find the first year a covenant is breached.
Blanks: Covenant compliance and headroom. Free with any account. Compare with the worked model when you are done: download above.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Build · Lab · ~10 min
Covenant Headroom
Compute the three maintenance ratios from a certificate, find the binding test and its EBITDA cushion, and say whether a given downside breaches.
Build · Lab · ~15 min
Capital Stack Challenge
Finance a real buyout from revolver to equity, hold it through a shock, and explain every layer against the deal the sponsor actually did.
Build · Lab · ~15 min
Optimal Capital Structure
Explain why more debt stops helping: watch coverage, rating and spread move as leverage rises until WACC turns.
Read · Guide · 11 min
Credit and Covenant Modelling: What a Lender Actually Tests
Read · Guide · 13 min
How to Build an LBO Model: The Build Order That Survives a Modelling Test
Read · Guide · 8 min
Restructuring Interview Questions: Fulcrum, Waterfall & Beyond
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
Apply · Skill
LBO Sanity Check
Review an LBO’s returns drivers and catch the assumptions doing the heavy lifting.
Vocabulary: Debt Capacity, Leverage Ratio (Debt/EBITDA), Interest Coverage Ratio, Fixed Charge Coverage Ratio (FCCR), EBITDA Cushion, Covenant, Cash Sweep, Term Loan (TLA / TLB), Maturity Wall, Loss Given Default (LGD).
Questions about this model
How is debt capacity calculated?
As the smallest of three answers. The leverage test multiplies FY0 EBITDA by the maximum total leverage assumed for the structure. The coverage test divides FY0 EBITDA by the minimum interest cover times the blended interest rate. The deleveraging test asks how much debt the business could repay a set share of from free cash flow within the loan’s tenor, solved in closed form so the model needs no iteration. The binding test is named, and the gap between capacity and the proposed debt is the cushion.
What is an EBITDA cushion?
The share of EBITDA that could be lost before a covenant breaks, with debt, interest, capex and taxes held at that year’s level. It turns three ratios against three different levels into one comparable number per test, and the smallest of them is the borrower’s real headroom.
Why does fixed charge cover bind before leverage here?
Because term loan A amortises heavily. Scheduled repayment is a fixed charge, so the years of large amortisation leave little room even while leverage is falling comfortably. A lender wanting a looser fixed charge test would ask for a flatter amortisation profile, which is the trade-off the model makes visible.
How does this differ from an LBO model?
An LBO model is built for the sponsor and ends in an equity return; this is built for the lender and ends in headroom, a refinancing test and a recovery estimate. They share the debt schedule, and the LBO model on this site is the other half of the same transaction.
What does it cost?
Nothing to preview: the whole workbook is on this page, and a free account works with it online, every formula included. Every starter workbook downloads with a free account. L3VLUP Plus ($4.99/month) keeps one worked model each billing month, yours for good, and L3VLUP Pro ($25/month) keeps every one.
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