What Is the Fixed Charge Coverage Ratio?
The fixed charge coverage ratio (FCCR) is a credit metric that tests whether a company's operating earnings are large enough to cover all of its recurring fixed obligations, not just interest. Because obligations like lease payments and scheduled debt amortization must be paid regardless of how the business performs, FCCR asks a stricter version of the question posed by the interest coverage ratio: can this borrower keep meeting its commitments if earnings soften?
A ratio above 1.0x means earnings cover fixed charges with room to spare, while a ratio below 1.0x signals that the company is funding its obligations from cash reserves or new borrowing rather than from current profits. Lenders treat FCCR as a stress gauge, and asset-based lenders in particular rely on it as their primary financial covenant.
How to Calculate FCCR
The textbook formula is FCCR = (EBIT + Fixed Charges Before Tax) / (Fixed Charges Before Tax + Interest Expense), where fixed charges most often means lease and rent payments. Suppose a company earns $120 million of EBIT and pays $20 million in lease costs plus $40 million of interest: FCCR = ($120M + $20M) / ($20M + $40M) = 2.3x, meaning earnings cover fixed obligations more than twice over.
Credit agreements usually define their own version, often (EBITDA − unfinanced capital expenditures − cash taxes) / (cash interest + scheduled principal payments). Because every deal negotiates the definition, the same company can show different FCCRs under different documents, so analysts always check the credit agreement rather than assuming a standard formula applies.
Why FCCR Matters in Practice
FCCR is the workhorse covenant in asset-based lending. Many ABL revolvers include a springing FCCR covenant, typically set at 1.0x, that only activates when availability under the facility falls below a set threshold. Middle-market cash flow loans frequently require a minimum FCCR of 1.10x to 1.25x, tested quarterly on a trailing twelve-month basis, and breaching that level is an event of default that hands leverage to the lenders.
For candidates recruiting into leveraged finance or private credit roles, FCCR shows up constantly in credit memos and covenant compliance certificates. Interviewers like it because it tests whether you understand that fixed obligations extend beyond interest — a borrower can comfortably cover its interest bill and still trip a fixed charge covenant once lease and amortization payments are counted.
