Interest coverage is a company's earnings, before interest and taxes, divided by its interest bill. It shows how comfortably the company can pay the interest on its debt. Below one, earnings do not cover the interest; around two and a half is often treated as a warning sign. Rising rates on floating-rate debt can cut it fast.
What the video says
In private credit, one ratio shows whether a borrower can keep up. It's called interest coverage. Say a company earns forty million a year before interest and taxes. Its interest bill is ten million. Forty divided by ten: coverage of four times. Then rates rise on its floating-rate loan, and the bill doubles to twenty million. Coverage drops to two times. Below about two and a half is often a warning sign. Below one, earnings don't cover the interest at all. So why do investors care? It shows how much room is left before payments are missed. And rising rates can eat that room fast. Earnings over interest. Watch the gap.
A simple example with round numbers, not advice. Terms vary by fund.
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