Cadena Levain: lease or buy under a 3.5x covenant
Cadena Levain operates 22 bakery-cafés. EBITDA is €4.2M on €28M of sales and net debt is €13.0M - a 3.10x leverage ratio against a covenant ceiling of 3.50x tested on trailing twelve months. The company wants a 23rd site. Two structures are on the table. Lease: €400k fit-out funded from the revolving credit line, plus €240k annual rent for 8 years; under IFRS 16 the lease liability is treated as debt (annuity factor 5.53 at a 9% discount rate) and rent is excluded from EBITDA. Buy: €2.4M purchase price funded with new debt, €60k per year maintenance (an operating expense), and an estimated €900k residual value after 8 years. Management's base case is €300k of annual EBITDA contribution from the new site.
1. Compute covenant headroom under both structures using the base case.
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Lease
- Lease liability: €240k × 5.53 = €1.33M
- Fit-out drawn on the revolver: €0.40M
- Net debt: 13.00 + 1.33 + 0.40 = €14.73M
- EBITDA: 4.20 + 0.30 = €4.50M (rent excluded from EBITDA, fit-out depreciation excluded)
- Ratio: 14.73 ÷ 4.50 = 3.27x
- Max debt at 3.50x = €15.75M → headroom €1.02M
Buy
- Net debt: 13.00 + 2.40 = €15.40M
- EBITDA: 4.20 + 0.30 − 0.06 = €4.44M
- Ratio: 15.40 ÷ 4.44 = 3.47x
- Max debt at 3.50x = €15.54M → headroom €0.14M
Both pass on paper. The buy option passes by 0.03x - roughly one bad month of sales, or one unbudgeted maintenance quarter, away from a technical default.
2. Re-run the downside case of €200k EBITDA contribution and explain which structure is more robust.
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Downside at €200k contribution
| Lease | Buy | |
|---|---|---|
| Net debt | €14.73M | €15.40M |
| EBITDA | €4.40M | €4.34M |
| Ratio | 3.35x | 3.55x - breach |
Break-even contribution to stay at 3.50x
- Lease: required EBITDA = 14.73 ÷ 3.50 = €4.208M → contribution of ~€10k. Essentially any trading result keeps the company compliant.
- Buy: required EBITDA = 15.40 ÷ 3.50 = €4.400M → contribution of ~€260k. The base case (€300k) clears it by only €40k.
Why the lease is more robust - and why that is partly an illusion. The lease is more robust on this metric because it adds €1.73M of debt rather than €2.40M, and because IFRS 16 strips the €240k rent out of EBITDA, flattering the numerator and the denominator. Economically, the rent is a fixed obligation of €1.92M over the term; the covenant simply does not see it. A lender reading the covenant mechanically would be comforted; a lender reading the cash flow would not.
The buy option is more painful precisely because it is honest: the €60k maintenance sits in EBITDA and the €2.4M sits in debt.
3. Which structure do you recommend, and on what grounds beyond the covenant?
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Recommendation: lease - but negotiate and disclose.
Economic comparison over 8 years (nominal, undiscounted)
- Lease: €1.92M rent + €0.40M fit-out = €2.32M
- Buy: €2.40M + €0.48M maintenance − €0.90M residual = €1.98M
Buy is cheaper by roughly €340k if the residual materialises. But that €340k is the price of carrying €2.4M of asset risk, residual-value risk and a 0.03x covenant cushion on a site format the company has never operated. The residual is an estimate, not a contract.
Grounds beyond the covenant:
- Covenant headroom is a strategic asset. At 0.14M of headroom, any subsequent shock - a bad quarter, an acquisition, a refinancing - becomes a default negotiation. The option value of €1M of headroom exceeds €340k.
- Reversibility. Site 23 is a new location, not a proven format. The lease caps the downside at the rent obligation; ownership does not.
- Accounting honesty. Do not let the IFRS 16 treatment be the deciding argument in the board paper. Add a sensitivity that treats the lease liability at the gross €1.92M obligation, and state the adjusted leverage so the board sees the real commitment.
Reverse to buy only if (a) the covenant is amended or equity is injected to restore ~0.5x of headroom, and (b) the residual value is supported by an independent valuation or a sale-and-leaseback indication.