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.
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.
| A | B | C | D | E | F | G | H | I | J | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||||||
| 2 | Blue cells only. $ millions, fiscal years; FY0 is the year of the financing. The borrower is invented. | |||||||||
| 4 | Year | Unit | FY0 | FY1 | FY2 | FY3 | FY4 | FY5 | FY6 | |
| 5 | The calendar | |||||||||
| 6 | Year number | # | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| 8 | Operating case | |||||||||
| 9 | Case: 1 = base, 2 = downside | # | 1 | |||||||
| 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: change to growth | % | -12.0% | -6.0% | -2.0% | 0.0% | 0.0% | 0.0% | ||
| 15 | Downside: change to margin | % | -4.0% | -4.0% | -3.0% | -2.0% | -2.0% | -2.0% | ||
| 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 (undrawn at close) | $m | 40.0 | |||||||
| 25 | Revolver rate when drawn | % | 6.5% | |||||||
| 26 | Commitment fee on the undrawn revolver | % | 0.4% | |||||||
| 27 | Term loan A | $m | 120.0 | |||||||
| 28 | Term loan A rate | % | 6.5% | |||||||
| 29 | Term loan A amortisation, % of original (matures FY5) | % | 10.0% | 15.0% | 20.0% | 25.0% | 30.0% | 0.0% | ||
| 30 | Term loan B | $m | 200.0 | |||||||
| 31 | Term loan B rate | % | 7.5% | |||||||
| 32 | Term loan B amortisation, % of original a year | % | 1.0% | |||||||
| 33 | Term loan B maturity, year | # | 7 | |||||||
| 34 | Senior unsecured notes | $m | 100.0 | |||||||
| 35 | Senior notes coupon | % | 9.0% | |||||||
| 36 | Senior notes maturity, year | # | 8 | |||||||
| 38 | Cash sweep | |||||||||
| 39 | Share of cash above the minimum swept to term loan B | % | 50.0% | |||||||
| 41 | Covenants | |||||||||
| 42 | Maximum total net leverage (steps down) | x | 5.8x | 5.5x | 5.3x | 5.0x | 4.8x | 4.5x | ||
| 43 | Minimum interest cover (EBITDA / cash interest) | x | 2.0x | |||||||
| 44 | Minimum fixed charge cover | x | 1.1x | |||||||
| 46 | Sizing tests | |||||||||
| 47 | Maximum total leverage the market will lend at close | x | 5.5x | |||||||
| 48 | Minimum interest cover at close | x | 2.3x | |||||||
| 49 | Share of the debt to be repaid from cash flow | % | 40.0% | |||||||
| 50 | Years to repay it (the term loan B tenor) | # | 7 | |||||||
| 52 | Refinancing and recovery | |||||||||
| 53 | Leverage at which the market would refinance | x | 4.5x | |||||||
| 54 | Distressed EBITDA, % of FY0 | % | 60.0% | |||||||
| 55 | Distressed EV / EBITDA | x | 5.5x | |||||||
| 56 | Administrative and priority claims, % of distressed EV | % | 5.0% |
Click any cell. The inspector names the line, the schedule it belongs to and what kind of cell it is; blue on cream is an input, black a calculation, green a value from another sheet. Scroll sideways to see every year.
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Credit model: the workbook
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What the base case says
- Debt capacity at close
- $440.0m
- Binding 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 headroom
- $339.8m
- Secured recovery in default
- 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: how much it can borrow, whether it still pays in a downside, how much room the covenants leave, what is owed at each maturity, and what the lenders recover if it defaults.
Debt capacity is set by three tests (leverage, interest cover, and the cash flow to repay a share of the debt within the term loan’s tenor), and the binding one is named. The proposed structure is a revolver, an amortising term loan A, a term loan B with a cash sweep, and senior unsecured notes.
Switch the case on the Assumptions sheet to 2 for the downside, which slows growth and cuts margins for the first years. Every covenant carries an EBITDA cushion, so the headroom is readable in either case.
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 16–18 · Debt, rows 21–24 · Debt, rows 27–28 · Debt, rows 31–41
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 6–9 · Maturities, rows 12–15
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 a credit 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, and how a distressed value distributed by priority gives 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. It keeps the model free of circular references, is slightly conservative while debt is falling, and is the convention most credit models use for that reason.
- Cash taxes are charged on EBIT less cash interest; the deleveraging test and the unlevered free cash flow use tax on EBIT alone.
- The order of cash each year: interest and taxes, then scheduled amortisation, then the revolver (drawn to hold minimum cash, repaid first from any excess), then the sweep to term loan B. What is not swept stays as cash.
- Each covenant’s EBITDA cushion holds the debt, interest, capex and taxes of that year constant and asks how far EBITDA alone could fall before the test breaks.
- The recovery sheet assumes default soon after close with the revolver fully drawn, which is the conservative reading a credit committee uses for loss given default.
Build it yourself
The starter workbook
The Covenants sheet has been cleared: total net leverage against its step-down, interest cover, fixed charge cover, each test’s EBITDA cushion, and the tightest test. Build them from the Debt and Operations sheets, then switch the case on the Assumptions sheet to 2 and find the first year a covenant breaks.
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 EBITDA by the most the market will lend against it. The coverage test divides EBITDA by the minimum interest cover times the 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. 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 inspect: the whole workbook is on this page. A free account chooses one worked model to keep, and downloads every starter workbook. L3VLUP Pro ($25/month) downloads the whole library and opens every model’s formulas in the inspector.
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