How to frame debt capacity before a refinancing process

A refinancing process that goes well looks straightforward from the outside. A business approaches two or three lenders, receives competitive term sheets, selects the right facility and closes within a few months. That outcome is achievable, but it depends heavily on how much work was done before the first call with a lender.

The mandates that drag, produce disappointing terms or stall entirely almost always share the same root cause: the borrower arrived before they were ready.

What lenders want to see before the term-sheet stage

Lenders are not evaluating your business against an abstract standard of creditworthiness. They are assessing whether they can put your deal through credit committee with a defensible number attached to it. That means they need:

A clean EBITDA figure they can use. Not a management accounts number, not an adjusted EBITDA that adds back everything uncomfortable, but a normalised figure that reflects what a rational buyer or lender would accept as the run-rate earnings of the business. The work here is not in the presentation layer — it is in the underlying analysis. Which adjustments are defensible? Which are not? What does the lender's credit committee think when they see a 30% uplift from adjustments?

A debt capacity model that shows headroom. Lenders want to see that you have run your own numbers before they run theirs. A well-constructed debt capacity model shows the maximum leverage available under three scenarios: base case, downside case and stress case. It includes maintenance capex (not just growth capex), working capital movements, tax, and any cash that is structurally unavailable to service debt. If your model does not show headroom under the downside case, the lender's credit committee will find that out for you — usually at the worst possible moment in the process.

A clear view on covenant framework. Before approaching lenders, a CFO or FD should know which covenants they can live with and which they cannot. Leverage covenants, interest cover ratios and free cash flow sweeps all have different impacts on operational flexibility. Agreeing a covenant package that looks acceptable in a clean year but trips in any seasonal dip is a common and expensive mistake.

The pitfalls FDs most often hit

Over-modelling EBITDA adjustments. The temptation to add back every non-recurring cost, exceptional item and management time allocation is understandable. But lenders see this constantly and they discount it heavily. An EBITDA figure that requires fifteen adjustments to get to a bankable number is a red flag, not a green one. The better approach is to be selective and conservative, and to be ready to defend each adjustment in detail.

Ignoring maintenance capex. Growth capex gets excluded from debt capacity models all the time — and correctly so if it is genuinely discretionary. Maintenance capex does not get excluded, but it routinely gets underestimated or folded into the broader capex number. Lenders will strip it back out. Businesses that have not thought carefully about the true maintenance capex requirement arrive at leverage multiples they cannot actually support.

A weak debt capacity narrative. Numbers alone do not win a refinancing. Lenders make decisions based on their confidence in management's understanding of the business and the risks to forecast performance. A CFO who can explain the debt capacity position clearly, who can articulate the sensitivities in the model and who can answer follow-up questions without reaching for the spreadsheet gives a lender more confidence than a model that looks perfect on paper but has no one who can speak to it.

Getting the preparation right

The practical workflow before a refinancing process starts should include:

• A proper debt capacity analysis run from the actual management accounts, not a top-down estimate
• A review of the EBITDA adjustments to identify which are defensible and which should be dropped
• A view on the covenant framework that would be workable under base and downside conditions
• An assessment of the lender market — which lenders are active in the sector, at what leverage multiples and on what pricing terms

If you want to run a quick sense check on your debt capacity position before going further, the K3CA debt capacity calculator is a useful starting point. It will not replace a properly modelled analysis, but it gives you an indicative read that can frame the conversation internally before you spend management time on a full lender process.