Fundamentals of Credit Analysis - Leverage ratios why, unsecured, included

segalm

Exhibit 20, page 262
For “Senior unsecured leverage” why do they included “Secured debt” in the calculation???

jmh530

Although the CFAI text does not mention it (at least I think so), in order to compute the leverage of only one layer of debt, you have to divide the total value of the debt of that layer plus the total value of the more senior layers’ debt by the EBITDA.
Here is an example:
EBITDA: $ 100m
Senior Debt: $ 300m – Leverage= 3x
Second Lien Debt: $ 200m – Leverage= 5x
Subordinated Debt: $ 400m – Leverage= 9x
If you did not add the more senior levels of the debt structure, then the leverage ratio would not be informative at all! (in this example the leverage of the second lien debt would be 2x, which would imply that it is safer than the 3x of the Senior debt, which is obviously wrong.)