Debt capacity
How much a borrower can borrow, and which test binds.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: debt capacity.Updated 1 October 2026
Part of credit and restructuring models, with the models, labs and guides around it.
What it does
The most a borrower can carry on the terms offered, set by whichever of three lender tests binds first. 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 finds the debt that free cash flow could repay a target share of within the tenor, which solves in closed form as N x FCF / (s + N x rate x (1 - tax)). Lenders lend against the smallest answer, and the gap between it and the proposed debt is the cushion.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 47–50: Maximum total leverage the market will lend at close, Minimum interest cover at close, Share of the debt to be repaid from cash flow, Years to repay it (the term loan B tenor)
- Operations, rows 14–17: Capex, Increase in working capital, Tax on EBIT (unlevered), Unlevered free cash flow
- Capacity, rows 5–7: Total debt at close, Blended cash interest rate on it, Total leverage at close
- Capacity, rows 10–13: Leverage test: maximum leverage times FY0 EBITDA, Coverage test: FY0 EBITDA / (minimum cover times the rate), Average unlevered free cash flow over the projection, Deleveraging test: N x FCF / (s + N x rate x (1 - tax))
- Capacity, rows 16–20: Debt capacity: the smallest of the three, Binding test, Capacity as a multiple of FY0 EBITDA, Cushion: capacity less the proposed debt…
What a reviewer looks for
- Leverage alone, with no test of repayment.
- Coverage tested at today’s rate when the loan floats.
- Capacity computed on adjusted EBITDA the lender would not accept.
Learn it, then build it
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
Vocabulary: Debt Capacity, Leverage Ratio (Debt/EBITDA), Interest Coverage Ratio.