Add-back cap

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

An add-back cap limits how much a borrower may add to EBITDA, when covenants are tested, for items such as restructuring costs, one-off expenses and expected cost savings, usually as a percentage of EBITDA or a fixed amount. With a 15% cap and EBITDA of US$40m before adjustments, no more than US$6m of add-backs count, however many are claimed. Lenders ask for one because the adjustments are management's own claims and have a habit of recurring; without a cap, a borrower nearing a breach can often find enough of them to pass.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.