Net versus gross

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A number of the covenants we have looked at can be calculated on either a net or gross basis, such as Debt / EBITDA, DSCR, ICR, LLCR and PLCR.

Net debt

Most leveraged finance transactions seem to use a net debt definition in the covenants. Any cash on hand or in bank accounts (sometimes inclusive of short-term investments) is deducted from the gross debt balance on the basis that the cash could readily be used to immediately repay debt, rather than being wholly reliant on continued earnings.

As discussed in our post on LLCR (and which also applies to PLCR) netting off cash balances in these calculations is not as consistent – is it ignored, added to the NPV or deducted off the debt?

Net interest

Net interest is commonly used in leveraged and corporate finance transactions. Here, any interest earned is directly deducted from the interest paid, and it is this net interest amount that is used in covenant calculations such as ICR and DSCR.
This approach is not common in project finance transactions, on the basis that any interest earned in a bank account is probably there for a specific purpose and not directly available to pay debt.


There is no firm rule as to whether you should be using gross or net values in your calculations – it all depends on the business, the loan type and any negotiating leverage. Using net values usually seems like a fair approach, but as discussed in other posts, it can be used to manipulate covenants through temporarily delaying certain payments and therefore increasing the cash balance.

See also:

Debt Service Cover Ratio
Interest Cover Ratio
Loan Life Cover Ratio
Project Life Cover Ratio
Debt service reserve accounts

Brendan WalpoleNet versus gross

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