I’d like to point to readers Frontier’s total leverage ratio repeatedly mentioned in its covenants isn’t a basic calculation of Net Debt/EBITDA or Net Debt/Equity but a slightly (well, not so slight) tweaked calculation of EBITDA metrics.
For starters, you cannot be using EBITDA figures published on Morningstar or Yahoo! Finance. The company and its creditors have their own calculation of EBITDA, which differs from the company’s own adjusted EBITDA calculation.
Per the CoBank Credit Agreement, definition of EBITDA goes as follows: ”
“ EBITDA ” means with respect to the Borrower and its Subsidiaries for any period, the sum of (A) operating income for such period, plus (B) to the extent resulting in reductions in such operating income for such period, (1) depreciation and amortization expense for such period and (2) the amount of non-cash charges for such period, plus (C) charges for severance, restructuring and acquisition (including acquisition integration) costs, plus (D) cost savings, operating expense reductions, other operating improvements and initiatives and synergies related to any Material Transaction that are (1) permitted under Regulation S-X of the Securities and Exchange Commission or (2) projected by a Financial Officer in good faith to be reasonably anticipated to be realizable within eighteen (18) months of the date of such Material Transaction (which will be added to EBITDA as so projected until fully realized, and calculated on a Pro Forma Basis, as though such cost savings, operating expense reductions, other operating improvements and initiatives and synergies had been realized on the first day of such period), net of the amount of actual benefits realized during such period from such actions; provided that, with respect to this clause (D)(2), such cost savings, operating expense reductions, other operating improvements and initiatives or synergies are reasonably identifiable and factually supportable (in the good faith determination of a Financial Officer of the Borrower); provided , further , that the aggregate amount of cost savings, operating expense reductions, other operating improvements and initiatives and synergies related to any Material Transaction added back pursuant to this clause (D)(2) or the definition of “Pro Forma Basis” (that are not permitted under Regulation S-X of the Securities and Exchange Commission) in any period of four consecutive fiscal quarters shall not exceed 20% of EBITDA calculated prior to giving effect to such add-backs added back pursuant to this clause (D)(2) for such period, minus (E) to the extent resulting in increases in such operating income for such period, the non-cash gains for such period, all determined on a consolidated basis in accordance with GAAP. For any period of calculation, “EBITDA” shall be calculated on a Pro Forma Basis.
Then, the Total Leverage Ratio is defined in the agreement as:
“ Total Leverage Ratio ” means, with respect to any fiscal quarter, as of the date ending such fiscal quarter, (a) the result of (i) Total Indebtedness minus (ii) the excess over $50,000,000, if any, of the sum of (x) unrestricted cash and Cash Equivalents plus (y) restricted cash and Cash Equivalents to the extent the use of such restricted cash or Cash Equivalents is restricted to the payment of either (A) an acquisition purchase price or related costs that have been financed with the proceeds of Indebtedness or (B) Indebtedness, all as of the date of calculation divided by (b) EBITDA measured for the then most recently completed consecutive four fiscal quarters.
After going through Frontier’s latest 10K Filing, the EBITDA figure came out to be $4.26 billion and it’s total covenant leverage equated to 4.08x on total net debt of $17.4 billion.