In an anything-goes world for debt, there's a newdefinition for Ebitda: Eventually Busted, Interesting Theory,Deeply Aspirational.

That's the tongue-in-cheek assessment of a Moody's analyst who'sbeen tracking earnings projections used by companies lately whenasking investors for loans. Ebitda really means earningsbefore interest, taxes, depreciation and amortization, butborrowers have been stretching the limits of what's acceptable whenthey tweak their accounting to boost the figure.

The adjustments—known as “add-backs” in Wall Street lingo—makecompanies look more creditworthy by increasing revenue and earningsforecasts. They're legitimate when companies use them to factor outforeseeable or one-time events that might unfairly reduce thenumber. But in this frothy market, the size and vagueness of someadd-backs seen in offering documents are raising eyebrows:

  • Eating Recovery Center, which helps people with diet disorders,almost doubled Ebitda through add-backs for a debt sale lastmonth to help finance CCMP Capital's purchase of a controllingstake in the company. Almost half of the add-backs were calculatedon the basis that the company will “capture the true earningspotential” of its expanded treatment centers.
  • When whitening-agent firm Kronos Worldwide Inc. asked lendersfor 400 million euros last month ($470 million), its earningsformula allowed wiggle room for half a dozen specific futureactions, such as mergers, “and any operational changes.” Kronosdidn't say what that means.
  • Avantor Inc.'s $7.5 billion financing, also last month, pitchedan adjusted earnings figure amounting to a 91% hike. The industrialsupplier claimed allowances such as shares awarded to employees ascompensation, and operational benefits from a merger.
  • GoDaddy Inc.'s offering back in February included 21 ways theweb-hosting registration service could adjust Ebitda upward,including repeatable savings and synergies from anything it does,or expects to do, in “good faith” for a two-year period.

Derek Gluckman, senior covenant officer at Moody's InvestorsService, who floated the cheeky definition for Ebitda, saidfrustrated investors have little choice but to buy because of theoverheated market.

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