How rising rates have brought Fixed Charge Coverage Ratio (“FCCR”)
to the forefront of borrowing conversations and its impact on borrowers’ debt capacity.

‎ ‎ ‎ ‎ ‎ ‎ FCCR became an afterthought for many over the last decade. Today, it’s a limiting factor. By pressure-testing FCCR, borrowers can better assess how much debt their business can manage (their debt capacity) and prevent financing surprises.

What is FCCR?

‎ ‎ ‎ ‎ ‎ ‎ FCCR evaluates a company’s ability to cover its obligatory costs. Costs that must be satisfied to keep the business up-and-running and in good standing, or its “fixed” costs – including taxes, capital expenditures (e.g., for facility/equipment upkeep) and financing principal & interest payments.

‎ ‎ ‎ ‎ ‎ ‎ The ability to cover these costs is measured by the ratio of operating profit (EBITDA) to fixed costs. Lenders set a minimum threshold, typically just above 1.0 – as less than 1.0 would mean profits are less than fixed costs, and the business risks insufficient funding to meet its obligations.

More Than a Metric

‎ ‎ ‎ ‎ ‎ ‎ FCCR addresses the critical lending question: “Will the borrower make enough money to pay me back on time?” (i.e., via scheduled principal and interest payments). As a result, lenders use FCCR extensively – during underwriting, in loan covenants, and as part of internal tracking systems to assess portfolio risk.

‎ ‎ ‎ ‎ ‎ ‎ FCCR is not your average metric. It’s nearly a full cash flow statement in a single formula – capturing what lenders truly care about. It’s also an inescapable economic reality – a sustainable business must (eventually) generate enough profits to meet its financial obligations.

FCCR’s Comeback

‎ ‎ ‎ ‎ ‎ ‎ After 10+ years of near-0% rates – parallel with the growth of non-bank financing carrying low principal amortization – FCCR lost its mathematical relevance. FCCR became out-of-mind, out-of-sight. Some went so far as to make FCCR covenants “springing” (present only under certain conditions) or dropping altogether, and Leverage (Debt-to-EBITDA) took the spotlight.

‎ ‎ ‎ ‎ ‎ ‎ However, with SOFR currently above 5% – FCCR is back (seemingly with a vengeance). Year-over-year, many borrowers have faced a near-doubling of interest rates – causing companies with the same leverage to experience FCCR compression, as shown below.

‎ ‎ ‎ ‎ ‎ ‎ This dynamic has redefined what an appropriate amount of debt financing is. The last column for the example company shows to re-establish last year’s FCCR cushion would require a 30%+ reduction in debt / leverage (resulting in 2.4x leverage vs. 3.5x previously).

Prevent Surprises

‎ ‎ ‎ ‎ ‎ ‎ With SOFR above 5%, fixed charge coverage can no longer be assumed and must be proactively considered by borrowers.

‎ ‎ ‎ ‎ ‎ ‎ Whether front-running covenant tightness or evaluating how much debt your company can manage before seeking financing, pressure-testing FCCR will help existing and prospective borrowers prevent surprises.

‎ ‎ ‎ ‎ ‎ ‎ We’ve created a tool for companies to evaluate their debt capacity by pressure-testing FCCR (see below).