Noetica’s Post

Capital markets folks listen up because this last week taught us something: time to make “𝗘𝗕𝗜𝗧𝗗𝗔” → “𝗘𝗕𝗜𝗧𝗗𝗔𝗧”, or risk a breach. “EBITDA” definitions in credit terms are incredibly important. Add-backs are highly negotiated, hard fought, and, in many cases, the difference between a go/no go on a leveraged finance deal. There’s a pretty good reason for this: large swings in EBITDA are the primary driver of defaults—making it incredibly important to properly insulate credit term EBITDA from any wider, non-operationally driven swings. So now, here’s my question: 𝘄𝗵𝘆 𝘀𝗵𝗼𝘂𝗹𝗱𝗻’𝘁 𝗯𝗼𝗿𝗿𝗼𝘄𝗲𝗿𝘀 𝗴𝗲𝘁 𝘁𝗼 𝗮𝗱𝗱 𝗯𝗮𝗰𝗸 𝘁𝗮𝗿𝗶𝗳𝗳𝘀? In a world where borrowers’ COGS can increase 100%+ overnight due to non-operational factors like tariffs, which may be ephemeral, uncertain and unpredictably large—borrowers and lenders alike should want to insulate core debt terms from those swings. As a matter of policy, lenders already functionally agree to all types of tax add-backs (excise, franchise, income, capital gains, etc.) under the theory that policy matters should not affect cash flow health assessments in credit terms—tariffs are no different. Noetica’s analytics illustrate one borrower got the memo: in 2018, in response to the first wave of tariffs, Motorcar Parts of America, Inc. included “amounts in connection with tariff costs incurred in excess of price increases” as an add-back to EBITDA in their credit deal, up to a $5M cap. 𝗧𝗵𝗶𝘀 𝗮𝗱𝗱-𝗯𝗮𝗰𝗸 𝗶𝘀 𝗽𝗿𝗲𝘀𝗲𝗻𝘁 𝗶𝗻 <𝟭% 𝗼𝗳 𝗰𝗿𝗲𝗱𝗶𝘁 𝘁𝗲𝗿𝗺𝘀 𝘁𝗼𝗱𝗮𝘆.   𝗕𝗼𝗿𝗿𝗼𝘄𝗲𝗿𝘀 𝗱𝗼 𝘆𝗼𝘂𝗿𝘀𝗲𝗹𝗳 𝗮 𝗳𝗮𝘃𝗼𝗿: pay 10 bps to your lender group for an amendment to add-back “tariffs” under your existing debt, otherwise your CFOs will be on edge the next 3.5 years. “𝗘𝗕𝗜𝗧𝗗𝗔” → “𝗘𝗕𝗜𝗧𝗗𝗔𝗧”