How the tool estimates the accordion as debt-incurrence optionality.

The doctrine (start here)

The debt covenant answers one question: can the borrower incur more debt? The liens covenant answers the separate question: can that debt be secured? The intercreditor agreement then answers the waterfall question: where does that debt rank? The analyzer sizes the debt-incurrence option first, then adds a priority overlay so the ranking question is visible.

Credit-capacity options are the rights lenders write to the borrower for the right to incur more debt. Each basket or exception is one option. The accordion is the cleanest version: fixed capacity plus an open-ended ratio door.

That framing matters because an incremental facility is rarely just a number. It is a bundle of rights:

• Free-and-clear capacity that can be drawn without passing the ratio test.
• Ratio capacity that expands as EBITDA grows or leverage declines.
• Grower drafting that lets a fixed basket scale with EBITDA.
• Reclassification optionality that can move debt between baskets after the fact.
• Priority ranking that separates senior / pari capacity from lien-junior, unsecured or subordinated capacity.
• MFN protection that gives lenders some economics back if higher-yielding pari debt is issued inside the protected window.

The tool keeps the main distinctions visible: selected-route capacity estimate is the amount produced by the chosen free-and-clear and ratio inputs; priority split is an assumed ranking overlay; option-cost teaching estimate is the spread-equivalent sensitivity after probability weighting and MFN attribution.

The capacity formula

The teaching model starts with selected mechanics commonly reviewed in a covenant analysis. The top-line estimate counts only the free-and-clear and ratio routes represented by the chosen inputs:

The free-and-clear tranche is capacity. The ratio tranche is headroom converted into euros. If a 6.0x test is available and current leverage is 4.5x on €1,687m of EBITDA, the ratio door alone is 1.5x × €1,687m, or €2,530.5m.

The future-deleveraging line is an illustrative placeholder and is not counted in the selected-route capacity estimate. It recognizes only that a ratio route outside the selected opening assumptions may become available later in the scenario.

The priority split then allocates the selected-route estimate across assumed ranking buckets:

The residual middle bucket is deliberate. Senior unsecured debt and second-lien debt are not always payment-subordinated, but they can still be lien-junior, unsecured, or otherwise worse in recovery than the existing senior secured package.

Capacity discipline across covenants

The same discipline applies beyond debt incurrence. Contractual availability is not one universal formula. It depends on the action, covenant package, test time, definitions, blockers and interactions:

For debt, that means the right to incur debt is separate from the right to secure it. For restricted payments, it means builder capacity, general baskets, equity proceeds and declined proceeds must be tracked after any prior distributions and any provisions that ding the builder. For investments, it means unrestricted-subsidiary and permitted-investment capacity may overlap with RP capacity but should not be double-counted. For asset sales, it means gross proceeds are not leakage capacity until repayment, reinvestment and offer mechanics are applied.

That is the source of defensibility: route-by-route capacity, action-by-action usage, and blocker-by-blocker testing. The calculator is a teaching implementation of that discipline for the accordion, not a full document parser for every permitted debt basket in an actual agreement.

Authority and teaching assumptions

The authority for any contractual-capacity conclusion is the actual credit agreement or indenture, reviewed with qualified counsel where appropriate. The calculator uses selected teaching mechanics; the document controls.

• Primary document mechanics. SEC-filed credit agreements show the basic pattern: free-and-clear incremental amount, ratio incremental amount, pro forma leverage tests, borrower election, and redesignation from free-and-clear into ratio capacity. See this SEC-filed incremental facility example.
• Capacity sharing and deemed usage. SEC-filed definitions show why a document analysis must account for allocation, reallocation, prior usage and deemed usage rather than simply adding headline baskets. See this SEC-filed RP example.
• Teaching conventions. The free-and-clear, ratio, MFN, priority and exercise inputs are simplified assumptions selected to demonstrate mechanics. They do not establish market practice or transaction-specific availability.
• Separate questions. Debt-incurrence permission, lien permission, payment ranking, lien priority and structural subordination require separate document analysis. The tool does not infer one from another.
• Framework overlay. The LevFin Academy framework maps selected legal routes into contingent-payoff language, then applies assumption-dependent teaching estimates and spread-equivalent sensitivities. These are not market prices or legal conclusions.

The inputs

The controls are split into scale, drafting, priority, economics, and MFN protection.

Input	Symbol	Range	What it does
LTM EBITDA	EBITDA	€100m–€2,500m	Denominator for ratio debt and grower baskets.
Debt face for bps	Debt	€500m–€10,000m	Denominator for translating euros of option value into spread-equivalent bps.
Current leverage	L0	2.5x–7.5x	Starting leverage for the ratio test.
Test horizon	T	3–7 yrs	Time window over which EBITDA volatility can make the ratio door usable.
Free-and-clear basket	F	€0m–€500m	Fixed incremental capacity available without passing the ratio test.
Grower prong	g	0%–35% EBITDA	Lets the free-and-clear basket scale with the business.
Leverage ceiling	Lmax	4.0x–7.5x	The incurrence ratio threshold. Headroom is Lmax - L0.
New debt tenor	n	2–8 yrs	Years used in the teaching estimate of the selected spread differential.
Senior / pari share	qsenior	0%–100%	Assumed share of the selected-route estimate allocated to senior secured or pari ranking.
Subordinated share	qsub	0%–100%	Share assumed to be contractually subordinated or otherwise junior in payment. The residual is shown as lien-junior / unsecured.
Marginal debt spread	s	25–250 bps	Incremental spread advantage or avoided spread cost captured by the borrower.
Fixed exercise	pF	0%–100%	Exercise probability for the free-and-clear tranche.
EBITDA volatility	σEBITDA	1%–25%	Proxy for uncertainty around ratio-test usability.
MFN cushion	c	0–150 bps	Allowed spread premium before MFN protection bites.
MFN sunset	m	0–24 months	Length of the MFN protection window.
Trigger probability	pMFN	0%–100%	Probability that higher-yielding incremental debt is issued inside the protected window.
New-issue premium	snew	0–300 bps	Expected spread premium on the new debt before the cushion is applied.

The valuation bridge

The clean theoretical object is a discounted risk-neutral expectation over EBITDA, leverage, market access, and exercise policy. The web tool uses a transparent one-scenario workbook bridge instead:

That first line is important: the free-and-clear input enters the selected-route capacity estimate, but its economic teaching estimate is still weighted by the selected fixed-exercise probability. The tool does not establish legal availability.

The 4 in the bps denominator is an average-duration proxy. It keeps the bridge in the same language as a credit spread: euros of borrower value converted into running bps against the debt face. A production spread-equivalent conversion should instead divide option PV by the risky PV01 of the actual debt cash-flow profile.

Why the live tool now shows a second bps line

The calculator deliberately shows two bps conversions side by side:

• Cost before MFN is the original teaching bridge: borrower_value × 10000 / debt_face / 4. It keeps the worked example comparable to the model and uses a four-year average-duration proxy.
• Tenor PV01 bps is the first production-style bridge: borrower_value / PV01, where the current browser implementation uses the selected debt tenor, annual accruals, no discount curve and 100% survival until a credit curve is supplied.

That second line is therefore not a new valuation model. It is a conversion discipline check: the same borrower-value numerator shown through a PV01 denominator rather than through the four-year teaching shortcut. Once the tool has a credit curve or hazard-rate input, the survival(t) and discount factors should replace the current neutral placeholders.

MFN protection is shown separately because it is modeled as lender protection, not as a reduction in the selected-route capacity estimate:

The tool floors the net option-cost teaching estimate at zero. If the modeled MFN protection exceeds the borrower-side estimate, the readout reports zero rather than asserting a relative-value conclusion.

A worked example (base case)

The default case is aligned to the workbook's debt-incurrence tab:

• LTM EBITDA: €1,687m
• Debt face for bps: €6,180m
• Current leverage: 4.5x
• Leverage ceiling: 6.0x
• Free-and-clear basket: €175m
• Marginal spread: 100 bps
• New debt tenor: 5 years
• Free-and-clear exercise: 55%
• Priority overlay: 85% senior / pari, 10% lien-junior / unsecured, 5% subordinated
• MFN: 50 bps cushion, 12-month sunset, 30% trigger probability, 100 bps new-issue premium

The selected-route capacity math is:

The priority overlay allocates that selected-route estimate as:

The value bridge is:

That is why the calculator puts a €2,706m selected-route capacity estimate beside a 46 bps option-cost teaching estimate. Both depend on the chosen assumptions; neither is a legal conclusion, market price or recommendation.

How to read the charts

The page has three visual checks:

• Priority split shows how selected-route capacity is assumed to rank: senior / pari, lien-junior / unsecured, and subordinated.
• Capacity bridge starts with selected-route capacity, shows any future ratio option as modeled optionality rather than present capacity, then shows the probability / exercise haircut into usable modeled capacity.
• Bps bridge is signed: left of center is the borrower-side option-cost teaching estimate, right of center is modeled MFN protection, and the final row is the net teaching estimate. The separate Tenor PV01 bps metric is a denominator check, not an additional line or an upgrade to the numerator's evidence.

The priority split is an assumed ranking overlay. The capacity bridge moves from a selected-route estimate to modeled economic exposure. The bps bridge is a teaching estimate. Debt incurrence, lien priority, structural seniority and option-style economics remain different questions.

Pricing-method alignment

The model is consistent with standard option-pricing discipline as a teaching bridge. It uses the right object: an option payoff, probability weighting, and conversion into spread-equivalent bps. The normal-CDF usability line and the optional 0.5x EBITDA future-capacity placeholder are scenario heuristics, not calibrated production-model outputs.

• Option-pricing alignment. The full valuation is a discounted risk-neutral expectation over simulated EBITDA, leverage, market access, and exercise states.
• Monte Carlo fit. The ratio door is path-dependent and state-contingent. Monte Carlo is the natural production method when leverage tests, reclassification, market windows, and MFN sunsets interact.
• Closed-form limits. Terminal-payoff methods are strongest when the payoff is European-style and the state dynamics are tractable. They are not forced here because the covenant payoff is not a vanilla terminal option.

So the correct read is: the web calculator is a transparent covenant-economics map; the production quant model would simulate the state variables path-by-path and average discounted payoffs under the chosen measure.

Assumptions & what they cost you

Selected accordion routes, not total debt capacity

The headline number is a selected-route capacity estimate under the chosen incremental / accordion mechanics only. It does not determine contractual availability or include every debt-incurrence route and bespoke blocker in an actual agreement.

Priority overlay, not a liens covenant parser

The analyzer estimates selected mechanics, then lets the user allocate the modeled amount by assumed ranking. It does not test whether debt can be incurred or secured, whether security is first- or second-lien, whether a non-guarantor creates structural seniority, or whether collateral capacity exists under the liens covenant and intercreditor agreement.

One normal-CDF usability proxy

The ratio test probability is a compact normal-CDF proxy around leverage headroom and EBITDA volatility. It is useful for intuition; it is not a substitute for a simulated EBITDA/debt path with actual definitions and add-backs.

Average-duration bps bridge

The bps conversion uses a four-year average-duration proxy. A desk model should replace that with risky PV01: the actual debt cash-flow profile, market discount curve and survival assumptions.

Simplified MFN

MFN protection is reduced to cushion, sunset, trigger probability, and expected new-issue premium. Real MFN turns on excluded debt, maturity carve-outs, currency, OID treatment, floors, inside/outside maturity, and pari versus junior status.

No reclassification engine

The tool talks about reclassification but does not optimize basket usage across time. A full model would allocate debt across fixed, ratio, acquisition, acquired-debt, non-guarantor and incremental baskets path-by-path.

---

Where this sits in the LevFin Book

This is the debt-incurrence companion to the restricted-payments builder basket. In the Book's covenant map, debt and liens control how leverage enters the structure; restricted payments and investments control how value leaves it. The accordion is the borrower's option to lever up when the business or the market gives it room.

Read with the framework in mind: the legal provision is the contract; the option is the economics embedded in the contract; the bps number is how the lender should compare that economics to the spread it is paid.