A leverage-based pricing grid is a table in the credit agreement that sets the loan's spread over the base rate by the borrower's leverage ratio, usually total debt to EBITDA. Lower leverage puts the borrower on a lower level with a smaller spread. The level resets each quarter, a few days after the compliance certificate showing the new ratio is delivered. The grid often sets the unused line fee as well. Because acquisition debt starts high and is paid down, the grid lets the borrower's cost fall as the risk falls, without renegotiating the loan.
- What moves
- The spread over the base rate, and often the unused line fee
- What drives it
- Usually total or senior leverage, as the credit agreement defines it
- When it resets
- Quarterly, after the compliance certificate is delivered
- Starting level
- Often fixed for the first quarters after closing
- If a certificate is late
- Pricing typically jumps to the highest level
- Seen on
- Bank and private credit cash-flow loans and revolvers
What a grid looks like
A grid is a short table with a handful of levels. Each level sets a range for the leverage ratio and the spread that applies in that range. The base rate floats as it would on any variable loan; SOFR plus a spread explains that part. The grid changes only the spread on top.
| Level | Total leverage (debt to EBITDA) | Spread over base rate, in basis points | Unused line fee, in basis points |
|---|---|---|---|
| I | 3.0 or more | 350 | 50 |
| II | 2.5 to under 3.0 | 325 | 40 |
| III | 2.0 to under 2.5 | 300 | 35 |
| IV | Under 2.0 | 275 | 30 |
The step between levels is usually modest, and the breakpoints are set around the leverage the lender expects at closing and the path it expects after. A grid is a lender's statement that it will accept less return for less risk, and a borrower's reason to deleverage on schedule.
How the level resets each quarter
The grid is driven by the compliance certificate. After each quarter, the borrower delivers financial statements and a certificate calculating the leverage ratio. A few business days after delivery, the spread moves to the level that ratio falls in, and stays there until the next certificate. The ratio is calculated exactly as the covenant is, using the agreement's definitions of funded debt and EBITDA over the last twelve months.
- Starting level. Most agreements fix the initial level for the first two or more full quarters after closing, often at a level set by the closing leverage, so early results cannot move pricing before the lender has seen them.
- Late certificate. If the certificate is not delivered on time, the spread typically moves to the highest level until it is. A missed reporting deadline can cost more than the numbers in the report would have.
- Restatement. If financial statements are later corrected and the true ratio was higher, many agreements require the borrower to pay the difference in interest for the periods affected.
- Default. While an event of default continues, many grids move to the highest level, before any default interest is added on top.
The certificate that tests your covenants is also the one that sets your price. Deliver it on time and calculate it the way the agreement does.
Why a grid rewards paying down acquisition debt
Acquisition loans start at their highest leverage. Debt is at its peak on the closing date, and EBITDA is whatever the target earned in its last year. From there, two things push leverage down: principal payments, including any excess cash flow sweep, and earnings growth. A grid turns that path into lower cost.
| Year | Debt at start of year | EBITDA | Leverage | Level | Spread cost for the year | Spread cost if stuck at Level I |
|---|---|---|---|---|---|---|
| 1 | 6,400 | 2,000 | 3.2 | I | 224 | 224 |
| 2 | 5,600 | 2,100 | 2.7 | II | 182 | 196 |
| 3 | 4,800 | 2,200 | 2.2 | III | 144 | 168 |
| 4 | 4,000 | 2,300 | 1.7 | IV | 110 | 140 |
Over four years the grid saves 68 of spread against a flat Level I price in this example, and the saving grows each year. Both columns charge the spread on the same falling balance, so the whole difference is the grid's doing. Compare a fixed-spread offer with a grid offer on the leverage path you actually expect, not on the closing-day spread alone. Interest rate vs all-in cost covers how to put offers on one basis.
What moves you up the grid
A grid works in both directions. Leverage rises when EBITDA falls or debt rises, and either can happen for reasons that are part of a healthy plan. An add-on acquisition financed with more debt raises leverage, and most agreements calculate it with the target's earnings included on a pro forma basis. Drawing heavily on a revolver at a seasonal peak raises funded debt at a quarter-end. A weaker year lowers EBITDA across four test dates.
The EBITDA definition matters as much as the results. Add-backs the agreement allows, such as one-time costs of the acquisition or run-rate savings from an integration, lower the ratio. Add-backs it does not allow, however reasonable, do not count. Some agreements let the borrower net cash on hand against debt; others do not. Reading the definitions in total leverage ratio and EBITDA add-backs before closing tells you where on the grid you will really start.
Other kinds of grid
Leverage is the most common driver, but not the only one. Some cash-flow loans use senior leverage, which ignores junior debt; that suits a structure with a seller note or mezzanine layer, because paying the junior debt does not move the grid. Some use a fixed charge coverage ratio, where higher coverage earns a lower spread.
Asset-based lines usually price off excess availability instead, measured as an average over the prior quarter: the more room under the borrowing base, the lower the spread. That grid rewards keeping the line lightly drawn rather than paying term debt down. How revolver interest is priced covers both kinds on lines of credit.
SBA 7(a) loans do not use grids. Their spread over the base rate is fixed at closing, within SBA's caps; above $350,000, a variable 7(a) rate is capped at the base rate plus 3%. The SBA maximum rate page lists every tier.
Negotiating the grid
- Where the first step sits. A first breakpoint just below closing leverage lets scheduled amortization earn a lower spread within the first year or two.
- How long the starting level is locked. Shorter is better for a borrower that expects to deleverage quickly.
- Which ratio drives it. Senior leverage when there is junior debt the lender does not control; total leverage when there is not.
- Whether the unused fee and letter of credit fees move with it. They often do, and it is worth asking when they do not.
- A cure for late delivery. Pricing that returns to the correct level, retroactively, once a late certificate is delivered.
Transparent's financing model projects the leverage ratio at each quarterly test date, the grid level it produces, and the resulting interest cost, alongside covenant headroom on the same dates. Offers with different grids, or a grid against a flat spread, can then be compared on the deleveraging path the business expects. The model is part of the package described on the package page.
Common questions
- How often does a pricing grid reset?
- Usually quarterly. The spread moves a few business days after each compliance certificate is delivered and stays at that level until the next one.
- What happens if I deliver the compliance certificate late?
- Many agreements move pricing to the highest level of the grid until the certificate is delivered. Some return it to the correct level retroactively; ask for that.
- Does a pricing grid change the base rate?
- No. The base rate floats as it would on any variable loan. The grid changes only the spread added to it, and often the unused line fee.
- Can pricing go up under a grid?
- Yes. If leverage rises, through lower EBITDA, a debt-financed add-on or a heavy revolver draw at quarter-end, the spread moves up to the matching level.
- Do asset-based lines use leverage grids?
- Usually not. They more often price off average excess availability under the borrowing base, so the spread falls as the line is used less.
- Is a grid better than a fixed spread?
- Only if you expect leverage to fall. Compare the two on the leverage path you actually expect over the life of the loan, not on the closing-day spread.