Case 074Private credit and direct lendingCore

A 400-bed hospital at 70% occupancy earns Rs 30,000 per occupied bed day at a 20% EBITDA margin. A lender proposes a Rs 150 crore loan with a 3.0x leverage covenant. At what occupancy does the covenant break?

The situation

Swasthik Hospitals runs a 400-bed multi-speciality hospital in a large city. Average occupancy is 70% and revenue per occupied bed day, room, procedures, pharmacy and diagnostics together, is Rs 30,000. The EBITDA margin is 20%. About 35% of revenue is variable cost, drugs, consumables and doctors' fee shares that move with patients; the rest of the cost, nurses, salaried staff, power and maintenance, is fixed.

A private credit fund is asked for a Rs 150 crore term loan to fund a new cardiac wing. The draft terms carry a maintenance covenant: debt must stay at or below 3.0x trailing EBITDA, tested every quarter. Assume the debt stays at Rs 150 crore over the test period.

Your task

Work out today's revenue, EBITDA and leverage, then find the occupancy at which the covenant breaks, and say whether the covenant gives the lender the protection it needs.

Quick check

Leverage today is about 2.45x against a 3.0x covenant. Roughly how far can occupancy fall before it breaks?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The covenant breaks at about 66% occupancy, only 4 points below today, because most of a hospital's cost is fixed. Revenue is Rs 306.6 crore and EBITDA Rs 61.3 crore, so leverage is 2.45x. The covenant needs EBITDA of at least Rs 50 crore. Each point of occupancy moves EBITDA by Rs 2.85 crore, so the headroom is about 4 points, not the 13 a constant margin would suggest. That is too tight for a hospital adding a new wing.

Step 1What does the hospital earn today, and how levered is the loan?

Start from beds, because a hospital's revenue is a capacity times a fill rate times a price. Think of a hotel: rooms, how many are let each night, and the rate per room. 400 beds for 365 days at 70% occupancy is 102,200 occupied bed days a year; at Rs 30,000 each that is revenue of Rs 306.6 crore, and a 20% margin gives EBITDA of Rs 61.3 crore. The Rs 150 crore loan is therefore 2.45x EBITDA, and the 3.0x covenant needs EBITDA of at least Rs 150 over 3.0, Rs 50 crore. EBITDA can fall Rs 11.3 crore, about 18%, before the test fails.

Step 2How much EBITDA does each point of occupancy carry?

Split the cost base, because the margin is not a constant. Variable costs are 35% of revenue, so each extra rupee of revenue keeps 65 paise; the other Rs 138 crore of cost is fixed, and one point of occupancy is Rs 4.38 crore of revenue and Rs 2.85 crore of EBITDA, about 4.6% of today's EBITDA. That is operating leverageThe way fixed costs make profit move more than revenue: when revenue falls, costs that cannot be cut take a growing share of what is left.: a 1.4% fall in revenue per point becomes a 4.6% fall in EBITDA, more than three times as large.

The relationship
EBITDA(o)=438.0×o×0.65−138.0=50  ⇒  o=50+138.0438.0×0.65≈66.0%\text{EBITDA}(o) = 438.0 \times o \times 0.65 - 138.0 = 50 \;\Rightarrow\; o = \frac{50 + 138.0}{438.0 \times 0.65} \approx 66.0\%
obed occupancy
438.0revenue at 100% occupancy, Rs crore: 400 beds x 365 days x Rs 30,000
0.65the share of each rupee of revenue left after variable cost
138.0fixed cost, Rs crore a year
What it says in wordsSet EBITDA at the occupancy you are solving for equal to the covenant minimum, then solve for occupancy.
EBITDA against occupancy, and where the 3.0x covenant breaks, Rs crore02040608010050%55%60%65%70%75%80%Bed occupancycovenant floor: 150 / 3.0 = 50wrong: margin held at 20%fixed costs: 2.85 a pointtoday: 61.3 at 70%breaks at 66.0%57.1%
Because about two thirds of Swasthik's costs are fixed, EBITDA falls Rs 2.85 crore for every point of occupancy lost and crosses the Rs 50 crore covenant floor at 66.0% occupancy, while a constant 20% margin would wrongly place the break at 57.1%.
Step 3Is that enough headroom, and what would you change?

No. Four points of occupancy is a normal seasonal swing for a hospital, and a new cardiac wing adds beds before it adds patients, which pulls average occupancy down in its first year. A covenant that trips on ordinary volatility hands control to the lender too early and invites a waiver negotiation every few quarters. Two fixes work. The lender can size the loan to the headroom it wants: for the covenant to hold down to 60% occupancy, where EBITDA would be about Rs 32.9 crore, the loan must be no more than about Rs 99 crore at 3.0x. Or it can keep Rs 150 crore and set the covenant at about 4.6x, stepping down as the new wing fills. The limitation: this treats occupancy as the only variable; revenue per bed day, the payer mix between insured and government schemes, and doctor attrition move EBITDA too, and a full credit paper would flex each.

Where candidates lose it

The usual loss is scaling EBITDA with occupancy at a constant 20% margin, which puts the break at 57% and makes the covenant look comfortable. Hospitals carry large fixed costs, so EBITDA falls much faster than occupancy and the real break is at 66%.

The second is stopping at the break point without a view. The lender's question is whether the covenant fits the business; the answer is a loan size or a covenant level, stated in rupees.

What the interviewer asks next

  • Revenue per bed day falls 5% as the payer mix shifts to government schemes. Where does the covenant break now?
  • How would you set covenant step-downs for the new cardiac wing?
  • Would you rather test leverage or interest cover for this borrower, and why?
  • What collateral and security would you take on a hospital loan?

Company names and figures are illustrative.