Investor group lambasts ‘earnings before coronavirus’


An investor advocacy group that counts some of the largest US asset managers among its members has lambasted companies that are ignoring losses resulting from the coronavirus pandemic when calculating cash flows for the purposes of credit agreements. 

The practice — which has become known as ebitdac, or earnings before interest taxes, depreciation, amortisation and coronavirus — has seen companies add back losses before making crucial calculations that govern things like how much debt a company can incur. 

Higher cash flow numbers resulting from ebitdac allow companies to massage how leveraged they are and perhaps even avoid triggering breaches of covenants that could put their future in the hands of creditors. 

The Credit Roundtable, which counts AllianceBernstein, Nuveen and Franklin Templeton among its members, released a letter addressed to global regulators, industry associations and rating agencies on Wednesday criticising the emerging practice. 

“We are concerned that recent examples of highly subjective reporting that attempts to show normalised results during economically volatile times will result in an unreliable basis for investment,” the letter said. “We believe ebitdac calculations include many hypothetical, highly subjective, and potentially misleading adjustments.”

The weakening of credit protections in bond and loan documentation in recent years meant many companies were able to add-back losses resulting from coronavirus without asking their creditors beforehand, noted analysts. Blackstone-owned businesses Schenck Process and Cirsa are two companies that have employed the tactic.

Others, such as US events group Live Nation Entertainment, have gone even further, substituting in last year’s earnings to avoid potential debt breaches.

“Understanding a company’s ability to service their debt obligations is absolutely critical for investors and credit research analysts,” said David Knutson, head of credit research for Schroders and vice-chair of the CRT. “When you start fudging the numbers it creates all sorts of problems . . . It’s a recipe for disaster.”

The CRT’s letter follows other industry groups and regulators that have warned against the use of ebitdac. The European Leveraged Finance Association (Elfa) criticised the practice in May, followed by the European Securities and Markets Authority and the International Organization of Securities Commissions, later in the month. 

“If a company adds back revenue in order to calculate its capacity to add debt, it’s calculating it on a false profitability,” said Sabrina Fox, executive adviser at Elfa. “We don’t know when those revenues will come back or if they even will. It’s not real. Ebitdac is fake.”

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