Understanding Optimal Debt Levels

Introduction

You're deciding how much debt to carry while protecting the business and investors; the optimal debt level is the specific amount of debt that minimizes WACC (weighted average cost of capital) while keeping default risk at an acceptable level, so you get cheaper capital without courting distress. This matters because lower WACC directly raises shareholder returns, funds more investment at better returns, and preserves strategic flexibility for M&A or downturns - in practice debt provides a tax shield and can cut WACC but too much raises default probability and refinancing risk. Here's the goal: give you practical measures, clear decision rules, and simple monitoring steps so you can pick a target debt range, test it under three scenarios, and track drift; many firms land around 20-40% debt-to-capital and see WACC improvements of about 1-2 percentage points at the sweet spot, but results vary by cash flow volatility and interest coverage - what this hides: industry specifics and covenant structure matter. Finance: model low/target/high debt scenarios and publish WACC, interest coverage, and default-probability outputs by Friday so you can set a policy range.

Key Takeaways

• Optimal debt = the amount that minimizes WACC while keeping default risk acceptable; many firms target ~20-40% debt-to-capital and can see ~1-2pp WACC improvement, but industry and covenant details matter.
• Track core metrics: Net Debt/EBITDA, Debt/EBITDA, Debt/Equity, Interest Coverage (EBIT/interest), and Free Cash Flow to debt service; monitor 3-5 year trends and covenant breach risk.
• Model rigorously: run low/target/high debt cases and DCFs (base, stressed, upside), incorporate probability of default and expected bankruptcy costs to pick the leverage sweet spot.
• Implement controls: set a target band with trigger/response rules, define covenants, liquidity buffers, stagger maturities, and assign Treasury/Finance ownership with regular reporting.
• Immediate actions: calculate current Net Debt/EBITDA, set a target band, run at least two stress scenarios, publish WACC/coverage/default outputs (near-term) and deliver a formal debt policy and 12‑month funding plan (by next quarter).

Core trade-offs and mechanics

You're deciding how much debt your company can handle while keeping costs low and default risk acceptable - here's a practical map of the trade-offs and what to do next.

Tax shield (interest deductibility) and its benefit to after-tax cash flow

Interest on debt is generally deductible for U.S. federal income tax purposes, which reduces taxable income and boosts after-tax cash flow; that deduction is the tax shield.

Here's the quick math: if you pay $1,000,000 in annual interest and your marginal federal tax rate is 21%, the tax shield equals $210,000 (interest × tax rate), meaning your after-tax cash outflow on that interest is $790,000.

Practical steps

• Measure your marginal and effective tax rates (include state taxes).
• Model after-tax cost of debt as rd × (1 - Tc) where Tc = marginal tax rate.
• Include non-cash limits and timing differences (net operating loss carryforwards, capex interest capitalization).
• Stress-test sensitivity to tax-rate changes; a 5 percentage-point tax shift changes the shield materially.
• Match debt tenor to asset life to preserve the shield over the relevant cash flows.

Best practices: quantify the tax shield in your WACC work and treat it as a marginal benefit, not a free lunch - the shield helps, but it doesn't remove default risk. One-liner: tax shields save cash today, but don't hide rollover risk.

Bankruptcy and financial distress costs that rise with leverage

As leverage increases, expected costs from financial distress grow faster than linearly - litigation and restructuring fees (direct), plus lost customers, supplier restrictions, and fire-sale asset discounts (indirect).

Work with a simple expected-cost formula: Expected distress cost = Probability of Default (PD) × Loss Given Default (LGD) × Firm Value. Example: if PD = 5%, LGD = 40%, and firm value = $500,000,000, the expected bankruptcy cost = $10,000,000 (0.05 × 0.4 × 500m). What this estimate hides: timing of costs and second-order market reactions.

Practical steps

• Run scenario DCFs: base, mild stress, severe stress - track covenant breach timing.
• Estimate PD using market signals (bond spreads, CDS if available) or scorecards (Altman Z, rating-implied PD).
• Estimate LGD from asset mix; tangible assets lower LGD, intangible-heavy firms have higher LGD.
• Maintain liquidity buffer sized for stressed needs - common target: cover 6-12 months of operating cash burn.
• Stagger maturities so no single year exceeds a set share (for example keep any single-year refinancing need 25% of total debt).

Best practices: translate expected-distress dollars into your capital policy - if the incremental tax shield is smaller than incremental expected distress cost, stop adding debt. One-liner: more debt raises expected costs quickly, so stress-test early and often.

Agency costs: creditors vs shareholders and incentive effects

Agency costs arise because shareholders (residual claimants) prefer upside gambles and lower payouts, while creditors want downside protection; managers may pursue growth or empire-building that misaligns with creditor claims.

Common manifestations: risk-shifting (equity holders favor risky projects), underinvestment (creditor-protecting covenants blocking good projects), and monitoring/enforcement costs (creditor oversight, covenant negotiation).

Practical steps

• Use covenants to align incentives - combine maintenance covenants (regular tests) with incurrence covenants (limits on new debt).
• Tailor covenant metrics: minimum Interest Coverage (EBIT ÷ interest) and maximum Net Debt/EBITDA; typical maintenance floors are around 2.5-3.0x interest cover for investment-grade-like cushions.
• Price flexibility: accept a modest spread premium for looser covenants if growth optionality is valuable.
• Structure compensation to reward risk-adjusted returns (leverage-adjusted ROIC), reducing manager preference for reckless risk-taking.
• Prefer secured debt for higher leverage where creditors need protection; use subordinated debt carefully for mezzanine funding.

Best practices: write clear covenant remedies and automated actions at triggers - covenant design is governance in code. One-liner: fixe d governance rules upfront to avoid costly fights later; it keeps incentives aligned and execution smoother (and yes, defintely worth the lawyer time).

Quantitative metrics to assess leverage

You need a small set of repeatable metrics that make leverage comparable across periods and peers, and that trigger clear actions when they move. Below I give definitions, step-by-step calculations, practical benchmarks, and exact example math using an illustrative FY2025 set of numbers.

Debt and leverage ratios for comparability

Use simple balance-based ratios to compare across firms and sectors: Debt/EBITDA, Debt/Equity, and Net Debt/EBITDA. They strip out accounting noise and focus on servicing capacity and capital structure.

Steps to calculate and monitor:

• Compute Total Debt = short-term debt + long-term debt on the balance sheet.
• Compute Net Debt = Total Debt - cash and equivalents.
• Use trailing twelve months (TTM) EBITDA or FY2025 EBITDA for comparability.
• Update quarterly and publish a rolling 12-month series for trend analysis.

Quick math using an illustrative FY2025 example: Total Debt = $800m, Cash = $50m, EBITDA (FY2025) = $250m, Equity = $600m. So Total Debt/EBITDA = 3.2x, Net Debt = $750m, Net Debt/EBITDA = 3.0x, Debt/Equity = 1.33x.

Benchmarks and actions: for stable utilities, 1-3x Net Debt/EBITDA is common; for cyclical industrials, 3-4x may be high risk. If Net Debt/EBITDA crosses your upper band, stop share buybacks and prioritize debt paydown immediately. One-liner: keep one canonical leverage ratio and watch it weekly.

Interest coverage for short-term solvency

Interest Coverage = EBIT / interest expense; it shows how much operating profit covers interest this year. Use EBIT (pre-tax operating profit) and interest expense on a TTM basis to smooth seasonality.

Calculation steps and best practices:

• Compute TTM EBIT and TTM interest expense from income statements.
• Calculate both headline coverage and a covenant-style coverage that excludes one-offs.
• Track monthly rolling TTM and flag if coverage drops below your trigger (common trigger: 3.0x for investment-grade style covenants).

Example using FY2025 figures: EBIT = $200m, interest = computed two ways. If weighted average rate = 3.0% on Total Debt $800m, interest = $24m, so coverage = 8.3x. If rates rise to 6.0% (interest = $48m), coverage falls to 4.2x. What this hides: rising short-term rates can cut coverage quickly; stress test a +200-400 bps move.

Action rules: set an early-warning at 5.0x for faster-moving businesses, and a hard trigger at 3.0x. If triggered, immediately limit discretionary cash uses, renegotiate covenants, or lengthen maturities. One-liner: Interest coverage is your quickest solvency thermometer.

Free cash flow to debt service and multi-year net leverage trends

Free Cash Flow to Debt Service (FCF/Debt Service) and multi-year Net Leverage trends show whether cash generation supports principal plus interest over cycles. Use a 3-5 year window to spot structural changes.

How to build the metric (step-by-step):

• Calculate NOPAT = EBIT × (1 - tax rate). Use FY2025 statutory or effective tax - example uses 25%.
• Compute FCF = NOPAT + D&A - CapEx - ΔWorking Capital (use TTM or FY values).
• Define Debt Service = interest expense + scheduled principal amortization for the next 12 months.
• FCF/Debt Service = FCF ÷ Debt Service; set thresholds (comfort > 1.2x, watch 1.0-1.2x, danger 1.0x).

Illustrative FY2025 example math: EBIT = $200m, tax = 25% → NOPAT = $150m. D&A = $30m, CapEx = $60m, ΔWC = $10m → FCF = $110m. Debt service = interest ($24m) + scheduled principal amortization ($50m) = $74m. So FCF/Debt Service = 1.49x.

Trend monitoring and governance:

• Publish a 3-5 year table of Net Debt/EBITDA and FCF/Debt Service (actuals and forecasts). Use FY2021-FY2025 or FY2023-FY2025 if older data is irrelevant.
• Stress test two scenarios: revenue down 15% and rates +300 bps; revenue up 10% and rates flat. Show covenant breach probabilities.
• Trigger actions: if FCF/Debt Service dips under 1.2x for two consecutive quarters, Treasury must present refinancing options within 30 days.

One-liner: trend the cash cover and net leverage together, not in isolation. Finance: produce a rolling 5-year Net Debt/EBITDA and FCF/Debt Service dashboard weekly and report to the CFO by next Friday - yes, do it now; it will defintely change decisions.

Modeling optimal debt

Takeaway: pick the debt level where the marginal tax shield equals the marginal expected distress cost; model that trade-off with incremental WACC changes, scenario DCFs, and explicit default-cost math so you can set a defensible target band today.

Minimize WACC: show how incremental debt changes cost of equity and debt

Start with the WACC formula: WACC = E/V Re + D/V Rd (1 - Tc). Re (cost of equity) rises with leverage because equity becomes riskier; Rd (cost of debt) also rises as debt increases and lenders demand wider spreads.

Step 1 - set base inputs for Fiscal year 2025 (illustrative): enterprise value = $1,000m, unlevered beta = 1.0, risk-free rate = 3.5%, equity risk premium = 5.5%, corporate tax rate = 21%. Initial Rd at low leverage = 3.5%.

Step 2 - use Hamada to update levered beta (beta_L = beta_U (1 + (1 - Tc) D/E)). Then Re = Rf + beta_L ERP. Example incremental table (debt increments of $200m):

• Case A: Net debt = $0m. D/E = 0. Re ≈ 9.0%. WACC ≈ 9.0%.

• Case B: Net debt = $200m. D/V ≈ 17%, D/E ≈ 0.20. Rd = 3.8%. Re rises to ≈ 9.8%. WACC ≈ 8.4%.

• Case C: Net debt = $400m. D/V ≈ 29%, D/E ≈ 0.57. Rd = 4.8%. Re rises to ≈ 11.2%. WACC ≈ 7.9%.

• Case D: Net debt = $600m. D/V ≈ 38%, D/E ≈ 0.97. Rd = 6.5%. Re rises to ≈ 13.6%. WACC ≈ 8.6%.

One-liner: WACC often falls initially as tax shields dominate, then rises once higher Rd and equity risk outweigh the shield.

Practical guidance: compute WACC at small debt increments ($50-100m steps for a mid-cap) and plot WACC vs debt; pick the minimum region and then apply buffers for covenant and liquidity risk. What this estimate hides: market-implied Rd and CDS spreads can move quickly - recalibrate quarterly.

Run scenario DCFs: base, stressed, and upside to test covenant breach probabilities

Build three full DCF variants for Fiscal year 2025 forward: base (management plan), stressed (downside sales shock), and upside (faster growth). Keep identical capital structure assumptions across scenarios so you isolate operating risk vs financing risk.

Step 1 - define cash-flow drivers: revenue growth, EBITDA margin, capex, change in working capital, terminal growth. Example assumptions (illustrative): base rev growth +5% yr, EBITDA margin 20%, capex = 3% of revenue; stressed rev growth -7% yr, margin 12%; upside rev growth +12% yr, margin 24%.

Step 2 - test debt covenants each year: interest coverage = EBIT / interest (covenant floor e.g., 3.0x), leverage covenant = Net Debt / EBITDA (covenant cap e.g., 4.0x), minimum liquidity = cash + undrawn facility. Run the three scenarios and record years of breach.

Step 3 - convert scenario outputs to breach probabilities by adding volatility: assume revenue growth volatility σ = 12% (annual). Run a simple Monte Carlo (1,000 draws) around your base-case growth path and count % draws that violate any covenant within the 3-year horizon. Example result (illustrative): at Net Debt $400m, covenant breach probability = 12%; at Net Debt $200m, breach = 4%.

One-liner: model covenants under many plausible operating paths - not just three point scenarios.

Best practices: align covenant definitions in the model with actual credit docs (EBIT vs EBITDA, pro forma add-backs), stress test with both revenue and margin shocks, and include liquidity drains (deferred receivables, capex spikes). Action: run the Monte Carlo and produce a covenant-breach heatmap for three debt targets.

Use probability of default and expected bankruptcy cost to compute expected value trade-off

Translate financing choices into expected value by comparing PV of tax shields to expected bankruptcy costs. Two simple ways to get PD (probability of default): market-implied (CDS spread → PD) or structural (Merton-style using asset volatility). If markets are illiquid, map credit rating to historical PD tables.

Step 1 - estimate annual PD for each leverage case. Illustrative mapping: low leverage PD = 1.0% p.a., medium = 5.0% p.a., high = 15.0% p.a. Step 2 - estimate bankruptcy loss given default (LGD). Use recovery between 30% and 60%; typical mid-cap LGD ≈ 40%.

Step 3 - compute benefits: annual interest = Debt Rd. Annual tax shield = Tc interest. PV of perpetual tax shield ≈ annual tax shield / Rd (or discount at probability-weighted discount rate). Example for Debt = $400m, Rd = 5.0%: interest = $20.0m, annual tax shield = $4.2m, PV ≈ $84m.

Step 4 - compute expected bankruptcy cost: EV_pre-debt ≈ $1,200m (illustrative). Expected bankruptcy cost = PD LGD EV_pre-debt. For PD = 5.0% and LGD = 40%, expected cost = 0.05 0.40 $1,200m = $24m.

Step 5 - net expected benefit = PV tax shield - expected bankruptcy cost = $84m - $24m = $60m. Repeat at higher debt: if Debt = $600m, PD = 15.0%, PV shield maybe $108m, expected cost = 0.15 0.40 $1,200m = $72m, net benefit = $36m.

One-liner: choose the debt where the incremental PV tax shield roughly equals the incremental expected distress cost.

Practical items and limits: calibrate PD with current CDS or bank quotes; stress LGD to 30-60%; include non-bankruptcy distress costs (restructuring fees, lost customers) as an add-on to LGD. What this hides: these simple calculations ignore dynamic responses (covenant waivers, equity injections) - model those explicitly in more complex Monte Carlo/agent-based runs.

Owner: Treasury to produce the incremental-WACC chart, three-scenario DCF set, and PD/LGD calibration table for the 2025 financial plan by Friday.

Business and market factors that shift the target

You're setting a leverage target and need to know what pushes it up or down; the quick takeaway: match debt capacity to cash-flow stability, collateral depth, market pricing, and growth needs so debt helps returns without blowing up flexibility.

Business cyclicality: stable cash flows justify higher leverage

If your revenue and EBITDA are predictable, you can carry more fixed debt. For example, utilities, regulated assets, and subscription businesses with steady churn tolerate higher Net Debt/EBITDA and tighter covenant bands than merchant retail or commodity producers.

One-liner: Stable cash flows buy you predictable debt service.

Practical steps and rules of thumb

• Set target Net Debt/EBITDA by volatility: stable: 3-4x, moderately cyclical: 1.5-3x, highly cyclical: 0.5-1.5x.
• Stress EBITDA with cycle shocks: apply a downside haircut of 25-40% for cyclical firms, 10-20% for stable firms, then recalc coverage and covenant headroom.
• Require higher interest-coverage cushions for cyclical firms: maintain post-stress EBIT/interest > 2-3x vs > 4x for stable firms.
• Use rolling 3-5 year trailing leverage to spot trend shifts; if Net Leverage rises > 0.5x year-over-year, trigger remediation.

What this estimate hides: industry norms vary - compare to 3-5 peers and adjust for country-specific cyclicality and tax regimes.

Asset tangibility and market pricing: secured collateral, rates, and spreads

Tangible assets let you borrow more and cheaper because creditors have recovery in default. Market pricing - risk-free rates plus credit spreads - changes the math: when spreads widen, debt gets more expensive and the marginal benefit of additional leverage falls.

One-liner: More collateral and cheaper markets means you can borrow more, but only until stress hits.

Actionable guidance and best practices

• Classify assets: operating intangibles (brand, software) vs tangible (real estate, machinery). Lendable value: use conservative LTV (loan-to-value) caps - real estate 60-70%, equipment 40-60%.
• Prefer secured tranches for higher leverage: structure senior secured term debt first, unsecured last; build amortization to match asset life.
• Stress interest cost: model a +300 basis point widening in credit spread. Quick math: on $500m floating debt, a +300bps increase raises annual interest by $15m (0.03×500m), lowering EBIT coverage accordingly.
• Hedge where appropriate: lock a portion of floating-rate exposure (IRS swaps) to cap refinancing risk; target fixed cover of 40-70% depending on visibility of cash flow.
• Maintain liquidity equal to 6-12 months of operating cash burn plus undrawn facilities sized to cover near-term maturities.

Limits: LTV and spread guidance depend on market cycles; recalibrate quarterly as primary spreads and swap rates move.

Growth profile: when to prefer equity over debt

High-growth firms usually avoid heavy fixed debt because growth requires reinvestment and debt service reduces optionality. If you expect volatile capex or acquisition funding, equity or flexible convertibles preserve runway.

One-liner: Growth needs argue for optional capital, not rigid interest bills.

Concrete decision rules and steps

• Target low leverage for high reinvestment: keep Net Debt/EBITDA 1x (often 0-0.5x) for high-growth tech or biotech until cash flow stabilizes.
• Use milestone tranches: prefer growth financing in equity or drawdown credit facilities that convert to term debt only after hitting revenue or EBITDA thresholds.
• Measure Free Cash Flow to Debt Service (FCF/interest+principal): keep > 1.2x as a minimum; if projected FCF is negative, avoid fixed-rate long-term debt.
• Plan dilution vs cost: model dilutive equity vs incremental debt cost over 3 scenarios (base, growth success, failure) to see NPV impact on shareholder returns.
• Governance: require board sign-off to move from flexible facilities to fixed amortizing debt; Treasury to present financing ladder and covenant impacts.

Owner action: Finance to model two paths this quarter - conservative (equity + revolver) and aggressive (term debt) - and quantify dilution and interest burden by scenario.

Implementation and governance

Set a leverage band: target, trigger, and floor with clear actions at each trigger

You're setting rules so debt levels are predictable and actionable - not a negotiation in a crisis.

Steps to set the band:

• Calculate current baseline: compute Net Debt and trailing twelve-month EBITDA for FY2025; Net Debt = gross debt minus cash and equivalents.
• Set a Target band tied to business profile. Example policy: target Net Debt/EBITDA 1.0-2.0x, trigger at 2.5x, floor at 0.5x. Adjust for sector volatility.
• Define immediate actions at each trigger: at trigger 1 (above target): suspend share buybacks and slow discretionary capex; at trigger 2 (above trigger): covenant notice to lenders, draw contingency liquidity, present 13-week cash plan to CFO.
• Set recovery rules: require return to target within a defined window (e.g., 12 months) or present a remediation plan with milestones every 30 days.

One-line rule: keep leverage inside the band or have a funded recovery plan within 12 months.

Design covenants and liquidity buffers: minimum cash, undrawn facilities, and amortization schedules

Design covenants and buffers so you don't run into technical default when markets wobble.

Practical steps and best practices:

• Define covenant floors using clear metrics: minimum Interest Coverage (EBIT/interest) at 3.0x, minimum Net Leverage (Net Debt/EBITDA) at the band floor, and a minimum current ratio if working capital is material.
• Set a minimum cash buffer equal to rolling operating cash burn for 12 weeks plus committed CapEx for 6 months, or a minimum absolute floor (example: $30-50m for mid-market firms).
• Maintain undrawn committed facilities covering at least 50-100% of the buffer; stagger facility expiry dates to avoid a single-wall maturity.
• Structure amortization to smooth principal payments: target no single-year maturity > 25% of total debt outstanding; include optional prepayment flex for surplus cash.
• Negotiate covenant holidays and step-downs tied to deleveraging milestones; include reasonable cure mechanics (e.g., board-approved remediation plan within 30 days).

One-line rule: hold cash + committed lines to cover 12 weeks of burn and next 12 months' principal needs.

Plan refinancing runway: lock in maturities to avoid concentration risk and assign ownership

Concentrated maturities kill options; a clear owner makes sure plans execute.

Refinancing runway practicalities:

• Map all maturities on a timeline and stress-test under three scenarios: base, rate stress (+200bps), and revenue shock (-20% sales). Require a minimum runway of 18 months under the stress scenario before major maturities.
• Layer maturities: aim for no more than 20-25% of principal maturing in any rolling 12-month window. If concentration exceeds that, prioritize early refinancing or covenant negotiation.
• Lock in long-term facilities when markets are favorable: convert short-term floating-rate debt to fixed or extend tenor to push out refinancing risk. Use interest rate collars where appropriate.
• Prepare market materials 9-12 months before key maturities: updated financial model, covenant trackers, and three-year business plan. Run lender and bank-sounding exercises at -12, -9, and -6 months.

Assignment of roles and reporting:

• Treasury owns execution: debt issuance, bank relationships, and day-to-day liquidity management.
• Finance owns monitoring and reporting: produce a weekly debt and liquidity dashboard for the CFO; include Net Debt, EBITDA run-rate, covenant headroom, and 13-week cash forecast.
• Define escalation: Treasury alerts CFO at 15 business days before any covenant breach risk or when rolling runway falls below 18 months. Board-level notice if remedial actions exceed pre-set thresholds.

One-line rule: Treasury executes; Finance reports weekly to the CFO and owns the dashboard.

Next step: Finance to prepare the FY2025 Net Debt/EBITDA calculation, propose a target band and 18-month refinancing plan by the start of next quarter; Treasury to schedule lender soundings within 30 days.

Understanding Optimal Debt Levels

Recap decision rule

You need a simple, executable rule: take the marginal tax benefit of extra debt (interest tax shield) and stop adding debt when that benefit is smaller than the marginal expected cost of financial distress (probability of default × expected bankruptcy/turnaround cost).

One-liner: add debt while the after-tax interest saving exceeds the expected distress cost.

Steps to apply the rule now:

• Compute marginal interest shield = Effective FY2025 tax rate × incremental interest expense.
• Estimate probability of default (PD) at the new leverage point using market signals (CDS, credit spread) or internal scorecard.
• Estimate expected bankruptcy cost (liquidation + indirect operational loss) as a % of enterprise value; use scenario ranges (low: 5%, mid: 15%, high: 30%
• Compute expected distress cost = PD × bankruptcy cost% × enterprise value.
• Compare incremental annual tax shield to annualized expected distress cost; stop when shield ≤ cost.

Here's the quick math (illustrative): assume incremental interest = $10m, FY2025 effective tax rate = 25%, so shield = $2.5m. If PD at that leverage is 5% and bankruptcy cost is 15% of a $500m EV, expected annual distress = 0.05 × 0.15 × 500 = $3.75m. Shield < distress → don't add debt. What this estimate hides: interaction with covenants, refinancing timing, and liquidity shocks.

Recommend immediate actions

You should produce three concrete outputs this week: current Net Debt/EBITDA using FY2025 numbers, a target leverage band, and two modeled stress scenarios (mild and severe).

One-liner: measure current leverage, set a band, and stress it.

Exact steps and best practices:

• Calculate Net Debt/EBITDA using audited FY2025 figures: Net Debt = total debt (short + long) - cash and equivalents; EBITDA = LTM FY2025 operating profit + D&A. Report Net Debt, EBITDA, and ratio to two decimals.
• Set a target band tied to business type: stable utility-like → 3.0-5.0x; mature stable product company → 1.5-2.5x; cyclical industrial → 0.5-1.5x. Set trigger at band upper bound + 0.5x.
• Build two stress scenarios using FY2025 baseline: mild stress = EBITDA - 15%, interest rates + 150 bps; severe stress = EBITDA - 35%, interest rates + 350 bps. Recalculate Interest Coverage (EBIT/interest) and Net Debt/EBITDA and flag covenant breach probabilities.
• Define automatic actions per trigger: at trigger 1 draw undrawn facility; at trigger 2 suspend buybacks/dividends; at trigger 3 seek covenant amendment or equity bridge.
• Document assumptions and sensitivity: show results with +/- 10% EBITDA and +/- 200 bps rates. State limits: scenario PD estimates depend on market spreads and are not forecasts.

Owner: Finance to propose policy and 12-month funding plan

Assign clear ownership, timeline, and deliverables: Finance (Treasury lead) drafts a formal debt policy and a 12-month funding plan using FY2025 audited numbers and the stress runs above.

One-liner: Finance writes the policy, Treasury runs the cash, CFO signs it off.

Concrete deliverables and timeline:

• By March 31, 2026: deliver a written debt policy with target band, trigger actions, covenant rules, and permitted instruments.
• By March 31, 2026: deliver a 12-month funding plan and 13-week cash forecast based on FY2025 balances and the stress scenarios.
• Weekly cadence: Treasury provides a rolling 13-week cash update to Finance; Finance reports variances to CFO every Friday.
• Refinancing runway: map maturities and commit to no more than 30% of unsecured maturities in any rolling 12-month window; propose alternatives if concentration exceeds this.
• Governance: CFO approval required for any deviation; Board-level quarterly review of leverage band breaches. Finance should defintely include fallback financing options (RCF, committed term loan, asset sales) with estimated timing and break costs.