CNU - Chorus

[peat]

shorting not allowed.

[Snoopy]

	Chorus View
Total Net Debt	$2,680m
divided by EBITDA	$648m
equals 'Net Selected Debt' / EBITDA	4.14

The number the banks are on the lookout for is anything over 4.75. Chorus would have you believe that they are doing really well. Anything under 4.2 ( Moody's ) and 4.25 ( S&P ) are the trigger ratings for a credit upgrade.

I am using the calculation method shown on Slide 22 from PR2021 (August)

FY2021	Chorus View (Pre IFRS16)	Chorus View (Post IFRS16)	Reference	Snoopy View
Bank and Note Debt (1)	$2,339m	$2,339m	(Slide 21 PR2021)	$2,339m
add PV of CIP Debt Securities (Senior)	$198m	$198m	(my post 2799)	$462m (2)	(Slide 21, PR2021)
add Net Leases Payable		$264m	(Note 5 AR2021)
equals Total Selected Debt	$2,537m	$2,801m		$2,801m
less cash	$53m	$53m		$53m
equals Total Net Selected Debt	$2,484m	$2,748m		$2,748m
divided by EBITDA	$629m	$649m		$629m
equals 'Net Selected Debt' / EBITDA	3.95	4.23		4.37

Notes

1/ Total net bank and other senior debt = $140m+($858m+$511m-$70m)+($200m+$500m+$182m)+$18m = $2,339m.
The $70m decrease in balance sheet value of the Euro bonds is because of a change in end of year value of an associated hedging instrument, the cross currency interest rate swaps used to hedge the Euro bonds (AR2021 p54). Likewise the $18m adjustment upwards in the value of the NZ bonds is because of the offsetting $18m decrease in value of interest rate swaps that are used to ensure hedge effectiveness (AR2021 p54).
2/ I don't like the accounting standard that lets a company discount debt that ultimately has to be repaid. So I am assuming a PV discount rate of 0%.

My 'Snoopy' view of this calculation removes the 'lease interest expense' (a part of rent) from EBITDA (so EBITDA is lowered). But I have also removed the 'Net Leases Payable' (a construct of IFRS16) as a liability, as I don't consider that a debt in a pre-IFRS16 sense. I don't consider my approach better than the approach Chorus has used. But my approach aligns better with the old way of assessing this banking covenant.

The other controversial thing that I have done is to disallow any discounting of CIP debt, in addition to removing the 'Net Leases payable' debt. By pure chance the effect of doing each of those two things separately has exactly cancelled out any overall debt change. Nothing should be read into this, as it is just a case of two unrelated changes unexpectedly neutralizing each other.

The number the banks are on the lookout for is anything over 4.75. Chorus would have you believe that they are doing really well. Anything under 4.2 ( Moody's ) and 4.25 ( S&P ) are the trigger ratings for a credit upgrade. Personally I don't believe Chorus do deserve a credit upgrade, based on my retro calculation that shows the company is a slightly less favourable debt position.

SNOOPY

[Snoopy]

"The facility has also been repriced to reflect current market rates and the covenants have been revised from 3.0 to 2.75 times interest coverage, to better align with Chorus’ rating thresholds."

	Snoopy View
EBIT	$246m
divided by Net Interest Expense	$126m
equals 'Interest Coverage'	2.0

Notes

1/ For the interest bill I am using in this calculation (Ref AR2020 p47):

$185m - $29m - $27m - $3m = $126m

I have removed from the net interest bill:

(i) $29m of CIP securities 'notional interest'
(ii) $21m of 'lease expense' interest and $5m amortisation from a swaps reset and $1m to restructure interest rate swaps.
(iii) $3m from the ineffective portion of a cashflow hedge.

This calc is telling me the 'Interest Coverage Ratio' is broken. Not good news!

FY2021	Pre IFRS16 View	Post IFRS16 View
EBIT	$215m	$224m
divided by Net Interest Expense	$92m	$112m
equals 'Interest Coverage'	2.3	2.0

Notes

1/ Pre IFRS16 EBIT Calculation

Published EBIT of $224m. But as explained in my post 2800, 'lease interest' (a rent cost) has not been removed from this figure. However 'lease interest' is an accounting construct derived from whole of contract rent agreements and is not equivalent to annual rent in any given year. We can best estimate annual rent from the Cashflow statement, as cashflow is not affected by accounting constructs (AR2021 p32).

Rent Estimate (exclusive of GST) is: ($28m/1.15) = $24m

Furthermore we must add back the 'Right of Use Asset Depreciation' of $15m (AR2021 p19). Why? Because although 'D' (depreciation) has already been removed to calculate EBIT, the 'Right of Use Asset Depreciation' is an incremental element of depreciation - an accounting construct created by IFRS16, that did not exist before. So if we want it to not exist again, taking a retrospective preIFRS16 view of the accounts, we have to remove this 'incremental deduction' i.e. add it back

So pre-IFRS16 EBIT is $224m -$24m +$15m = $215m

2/ Pre IFRS16 Interest Calculation

For the net interest bill I am using in this calculation (Ref AR2021 p41):

($153m-$1m) - $34m - $30m + $4m = $92m

I have removed from the net interest bill:

(i) $34m of CIP securities 'notional interest' (AR2021 p20)
(ii) $20m of 'lease expense' interest and $7m amortisation from a swaps reset and a further $3m undisclosed. (AR2021 p20)

And I have added back a reduction in interest:
(iii) $4m from the ineffective portion of a cashflow hedge. (AR2021 p20)

The latest reference i can find to the revised interest ratio coverage indicator is in this 25-05-2017 press release:
https://stocknessmonster.com/announc...nu.nzx-301693/

The interest coverage result of 2.4 is less than the revised 2.75 interest coverage covenant referred to in the link above. This calculation is telling me the 'Interest Coverage Ratio' covenant is broken. Not good news!

3/ Post IFRS16 Calculation

For the interest bill (see calculation above), I am now adding back the 'lease interest expense' that I had previously removed:

$92m + $20m = $112m

Since we are now working with current EBIT figures, EBIT remains as reported at $224m (AR2021 p16)


SNOOPY

[zspoon]

Is there a reason you’re using EBIT rather than EBITDA for interest cover calc?

[Snoopy]

Is there a reason you’re using EBIT rather than EBITDA for interest cover calc?

Good question. Answer: Because 'Simply Wall Street' do it?

https://simplywall.st/stocks/nz/tele...nsidered-risky

Maybe that wasn't such a good answer as the "Simply Wall Street" guys do seem to be a bit 'out there' with some of their valuations!

According to these guys:

https://learn.financestrategists.com...overage-ratio/

'Interest Coverage Ratio' can be either EBIT/I or EBITDA/I. But then in the worked example they use EBIT/I. Unlike the 'Net Senior Debt' calculation, I haven't yet found a worked example of 'Interest Coverage Ratio' as calculated by Chorus themselves. Anyone have an opinion as to which calculation method I should use and why?

SNOOPY

[zspoon]

It depends on what is agreed with the bank - there are various formulations, including straight net profit. At the end of the day all this really is is a KPI for the bank to track which could indicate serviceability issues.

One would presume that they aren’t using EBIT, otherwise you’d be seeing a disclosed covenant breach based on your own version of workings - particularly give the gap between EBIT and EBITDA is so large for Chorus given their massive depreciation charge. Given the size of non-cash items in their EBIT, this would have a poor correlation with ability to service interest obligations. It would also be unusual to have one covenant being linked to EBITDA, and another being linked to EBIT.

[Snoopy]

It depends on what is agreed with the bank - there are various formulations, including straight net profit. At the end of the day all this really is is a KPI for the bank to track which could indicate serviceability issues.

One would presume that they aren’t using EBIT, otherwise you’d be seeing a disclosed covenant breach based on your own version of workings - particularly give the gap between EBIT and EBITDA is so large for Chorus given their massive depreciation charge. Given the size of non-cash items in their EBIT, this would have a poor correlation with ability to service interest obligations. It would also be unusual to have one covenant being linked to EBITDA, and another being linked to EBIT.

I am not sure this post will end up being coherent, but I thought I would throw out a few 'random thoughts' on this topic, while thinking about a 'housing loan analogy'.

For 1/ 'Net Senior Debt' / EBITDA , this is the equivalent of 'Loan to Income Ratio' borrowing agreement for a homeowner. From a bankers perspective, they don't care if you don't keep the house looking brand new (the DA bit is the amount of money you should be spending on sandpaper, overalls and paint). As long as you are holding down your high paying job and the associated cashflow is coming in to look after the bank loan balance, that is all the bank cares about.

2/ EBITDA / 'Net Interest', is a straight 'cashflow in' to 'cashflow out' measure, and might be thought of as analogous to measuring your ability to service an 'interest only mortgage'.

There is of course a relationship between 'Net Interest' and 'Net Senior Debt', the former being an annual payment that is a fractional multiple of the latter. So in that, sense I might argue that 'Net Senior Debt' / EBITDA (1) and EBITDA / 'Net Interest' (2), although separate numbers, are actually measuring the same thing. Having said that, (1) does not change with interest rates. Whereas (2) will reduce in value and increase in risk when interest rates rise. What (2) is saying is that, as interest rates rise, your loan will require more of your income to service it. I would have said that fact is self evident, and there is no need to contrive a statistic to tell yourself what you already know!

What about:

3/ EBIT / 'Net Interest'? (3) is again an analogous measure to an 'interest only mortgage' home loan, albeit a loan on a tighter leash than covenant (2) . Imagine if you were a taxi driver borrowing against your house to buy your brand new taxi cab. After 5 years, your cab might have clicked over sufficient kilometres -with the associated wear and tear- to be in need of replacement, PLUS you may have to renew your taxi operators licence. IOW the 'DA' part of your annual accounts, is representing money you have to put aside each year, just to stay in business.

One conclusion from this is that if you were in a business with a required high capital replacement spend (e.g. running a taxi) then,

1/ the depreciation on your vehicle and
2/ amortisation of your fixed period taxi licence,

represents cash you will have to stump up every 5 years or so, just so you can keep operating your business as it is now. IOW the 'DA' bit of the accounts is not free cashflow in the strictest sense, but represents money that must be put aside every year just to allow normal operations to continue like now, over the medium term.

In this 'taxi' borrowing example, (3) is a much more useful statistic than (2). Also in this 'high depreciation' situation, (3) is the best measure of whether your bank can expect their payments coming in each week, whereas (1) is a better measure of whether the bank are likely to get all their loan capital back - eventually.

Nevertheless, IF your company owns a very long lived asset, like a neighbourhood fibre network, AND has been granted an indefinite licence to operate that network (IOW there is no need to regularly rebuild the 'book value' of certain company assets, as the cash generating ability of those assets is not being reduced in any meaningful way by 'wear & tear' - somehow Chorus springs to mind), THEN (2) is a better 'cash in', 'cash out' 'business balance measure'. But in those situations, is (2) really measuring anything different to (1)? I might argue that in the current low interest rate environment, and with the majority of interest payments being fixed by hedging, it isn't! Could this be the reason that Chorus doesn't mention 'Interest Coverage Ratio' in its presentations these days?

SNOOPY

[Snoopy]

The difference between total capital expenditure and sustaining capital expenditure is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow
▪ free cash flow will be defined as net cash flows from operating activities minus sustaining capex."

The following table is compiled from information in:

a/ Slide 34 of the 17th November 2020 presentation.
b/ AR2020 p28

Capex over 2020
Fibre Layer 2 Sustaining	$31m
Fibre Products & Services Sustaining	$14m
Fibre 'Other Fibre Connections' Sustaining	$20m
Fibre Customer Retention Sustaining	$7m
Fibre UFB Communal Development		$170m
Fibre Connections & Layer 2 Development		$251m
Other Fibre Connections & Growth Development		$42m
Fibre Customer Retention Development		$13m
Fibre Total			$548m
Copper Network Sustaining	$31m
Copper Layer 2 Sustaining	$7m
Copper Customer Retention Sustaining	$16m
Copper Connections Sustaining	$1m
Copper Development		$0m
Copper Total			$55m
Common IT Sustaining	$43m
Common Building & Engineering Services Sustaining	$17m
Common Development		$0m
Common Total			$60m
Sustaining Total	$186m
Development Total		$476m
Overall Total			$663m

The difference between total capital expenditure and sustaining capital expenditure is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow
▪ free cash flow will be defined as net cash flows from operating activities minus sustaining capex."

The following table is compiled from information in:

a/ Slide 43 of the 23rd August 2021 presentation.
b/ AR2021 p21

Capex over 2021	Sustaining	Development	Sub Total
Fibre Layer 2 Sustaining	$31m
Fibre Products & Systems Sustaining	$11m
Fibre Network & 'Other Fibre Connections' Sustaining	$22m
Fibre Customer Retention Sustaining	$11m
Fibre UFB Communal Development		$147m
Fibre Connections & Layer 2 Development		$244m
Other Fibre Connections & Growth Development		$83m
Fibre Customer Retention Development		$18m
Fibre Total			$567m
Copper Network Sustaining	$29m
Copper Layer 2 Sustaining	$4m
Copper Customer Retention Sustaining	$11m
Copper Connections Sustaining	$1m
Copper Development		$0m
Copper Total			$45m
Common IT Sustaining	$46m
Common Building & Engineering Services Sustaining	$14m
Common Development		$0m
Common Total			$60m
Sustaining Total	$180m
Development Total		$492m
Overall Total			$672m

The year to year comparison with the quoted post above shows a $6m reduction is 'sustaining capital expenditure'. But that includes $10m in sustaining costs less spent on the copper network. So sustaining capex for the fibre network has gone up over the year, although that is in the face of a fibre network that is still growing. Nevertheless as long as the overall sustaining capex comes down,

free cash flow = net cash flows from operating activities - sustaining capex

then free cashflow goes up. Since dividends going forwards will be based on 'free cashflow', this is a good thing for shareholders.

SNOOPY

[Snoopy]

Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 and FY2023 values interpolated).

Chorus have not provided any forecast as to where they expect their non-fibre revenue to go over the next few years. I have inspected the five year revenue trends for:

1/ 'copper connected revenue' and
2/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2021 to FY2024 inclusive. The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have over HY2021 already declined on an annualised basis (that means no further deterioration over FY2021) of $70m. So I am forecasting an $80m decline over FY2021, $70m over FY2022, $60m over FY2023 and $50m over FY2024. The diminishing decline rate I am modelling to take account of a slowing trend as easy conversions to fibre have happened already. My table of forecast 'total change of revenue' over the period of interest is as follows.

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021F	FY2022F	FY2023F	FY2024F
Fibre Revenue	$133m	$202m	$276m	$368m	$468m	$592m	$715m	$735m	$755m
Fibre Revenue Increment		+$69m	+$74m	+$92m	+$100m	+$124m	+$123m	+$20m	+$20m
Fibre Revenue Increment Percentage		+51.9%	+36.6%	+33.3%	+27.2%	+26.5%	+20.8%	+2.8%	+2.7%
Non-Fibre Revenue	$875m	$838m	$714m	$602m	$491m	$409m	$339m	$279m	$229m
Non-Fibre Revenue Decrement		-$37m	-$124m	-$112m	-$111m	-$82m	-$70m	-$60m	-$50m
Non-Fibre Revenue Decrement Percentage		-4.3%	-14.8%	-15.7%	-18.4%	-16.7%	-17.1%	-17.7%	-17.9%
Total Revenue	$1,008m	$1,040m	$990m	$970m	$950m	$1,001m	$1,054m	$1,014m	$984m

The actual FY2021 revenue figures have been published as I write this. So it is time to update my revenue forecasting table.

Chorus has been locked in a regulatory battle with the Commerce Commission on how much 'maximum allowable revenue' (MAR) their 'regulated asset base' of fibre broadband assets will be allowed to charge their downstream retail customers over FY2022 through to FY2024, otherwise known as the 'Price Quality (PQ) Period - First.' (PQP1)

1/ The initial Commerce Commission proposal on 26-03-2021 was a rising sum starting from $715m (FY2022) rising to $755m (FY2024).
2/ A revised proposal on 27-05-2021 reduced this to a range from $689m to $786m.
3/ A further comment on 19-08-2021 from the Commerce Commission stated.

"The Commission has noted in its draft RAB (Regulated Asset Base) decision today that “If all other aspects of our draft PQ decision remained unchanged, our indicative estimate of the combined impact of these decisions would lead to a 2%-2.5% reduction in allowable revenue over the PQP1 period. This figure also includes the impact of updated WACC values applied in the pre-implementation period.”

The market took this to mean that the revised downwards regulated revenue rates may yet be increased again by the time the final decision in December comes out. The case Chorus made to the Commerce Commission was for a regulated rate range between $720m to $820m. I am doubtful that the Commerce Commission will be that generous in their final regulated outcome figures. So for the purpose of this update I am going to assume that the Commerce Commission raises the allowable revenue figures back to the range of the 26-03-2021 proposal: $715m (FY2022) rising to $755m (FY2024) [Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2023 values interpolated).]

My table of forecast 'total change of revenue' over the period of interest is as follows.

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021	FY2022F	FY2023F	FY2024F
Fibre Revenue	$133m	$202m	$276m	$368m	$466m	$545m	$715m	$735m	$755m
Fibre Revenue Increment		+$69m	+$74m	+$92m	+$98m	+$79m	+$170m	+$20m	+$20m
Fibre Revenue Increment Percentage		+51.9%	+36.6%	+33.3%	+26.6%	+17.0%	+31.2%	+2.8%	+2.7%
Non-Fibre Revenue	$875m	$838m	$714m	$602m	$493m	$402m	$332m	$272m	$222m
Non-Fibre Revenue Decrement		-$37m	-$124m	-$112m	-$109m	-$91m	-$70m	-$60m	-$50m
Non-Fibre Revenue Decrement Percentage		-4.3%	-14.8%	-15.7%	-18.1%	-18.5%	-17.4%	-18.1%	-18.4%
Total Revenue	$1,008m	$1,040m	$990m	$970m	$959m	$947m	$1,047m	$1,007m	$977m

Notes

1/ 'Non-fibre revenue' up until and including FY2021 has been calculated by subtracting 'Fibre revenue' from 'Total revenue'.

2/ Chorus have not provided any forecast as to where they expect their non-fibre revenue to go over the next few years. I have inspected the five year revenue trends for:

a/ 'copper connected revenue' and
b/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2022 to FY2024 inclusive (Actual figures were $118m over FY2020 and $119m over FY2021). The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have taken an $91m decline over FY2021. So I am forecasting declining revenue to continue: down $70m over FY2022, $60m over FY2023 and $50m over FY2024. The 'diminishing decline rate' I am modelling to take account of a slowing trend as easy conversions to fibre have happened already.

--------------------

So what to make of this? IF you compare the actual fibre revenue over FY2021 of $545m with

a/ the forecast regulated fibre revenue for FY2021 (slide 24 PRHY2021) $620m (interpreted from graph), OR
b/ my linearly interpolated FY2021 fibre revenue of $592m (being the arithmetic average of the previous year's fibre revenue used figure of $468m and the prescribed first year of MAR $715m).


THEN that actual revenue represents $47m to $75m less revenue than forecast just six months ago. That seems to be an astonishing drop in projected annual fibre revenue in just six months, which has to call into question the forecasting ability of Chorus. Have I got that observation right?

SNOOPY

[Snoopy]

Is there a reason you’re using EBIT rather than EBITDA for interest cover calc?

To get another angle on this, I have decided to rework my interest rate covenant calculations using EBITDA

FY2021	Pre IFRS16 View	Post IFRS16 View
EBIT	$215m	$224m
divided by Net Interest Expense	$92m	$112m
equals 'Interest Coverage'	2.3	2.0

Notes

1/ Pre IFRS16 EBIT Calculation

Published EBIT of $224m. But as explained in my post 2800, 'lease interest' (a rent cost) has not been removed from this figure. However 'lease interest' is an accounting construct derived from whole of contract rent agreements and is not equivalent to annual rent in any given year. We can best estimate annual rent from the Cashflow statement, as cashflow is not affected by accounting constructs (AR2021 p32).

Rent Estimate (exclusive of GST) is: ($28m/1.15) = $24m

Furthermore we must add back the 'Right of Use Asset Depreciation' of $15m (AR2021 p19). Why? Because although 'D' (depreciation) has already been removed to calculate EBIT, the 'Right of Use Asset Depreciation' is an incremental element of depreciation - an accounting construct created by IFRS16, that did not exist before. So if we want it to not exist again, taking a retrospective preIFRS16 view of the accounts, we have to remove this 'incremental deduction' i.e. add it back

So pre-IFRS16 EBIT is $224m -$24m +$15m = $215m

2/ Pre IFRS16 Interest Calculation

For the net interest bill I am using in this calculation (Ref AR2021 p41):

($153m-$1m) - $34m - $30m + $4m = $92m

I have removed from the net interest bill:

(i) $34m of CIP securities 'notional interest' (AR2021 p20)
(ii) $20m of 'lease expense' interest and $7m amortisation from a swaps reset and a further $3m undisclosed. (AR2021 p20)

And I have added back a reduction in interest:
(iii) $4m from the ineffective portion of a cashflow hedge. (AR2021 p20)

The latest reference i can find to the revised interest ratio coverage indicator is in this 25-05-2017 press release:
https://stocknessmonster.com/announc...nu.nzx-301693/

The interest coverage result of 2.4 is less than the revised 2.75 interest coverage covenant referred to in the link above. This calculation is telling me the 'Interest Coverage Ratio' covenant is broken. Not good news!

3/ Post IFRS16 Calculation

For the interest bill (see calculation above), I am now adding back the 'lease interest expense' that I had previously removed:

$92m + $20m = $112m

Since we are now working with current EBIT figures, EBIT remains as reported at $224m (AR2021 p16)

I consider there are two ways to do this.

1/ The first is to consider what the EBITDA was in pre IFRS16 times. EBITDA does not take into account any interest charges. That means the 'lease interest' part of the 'current accounting standard' annual interest charge - which I class as a rent substitute - has not been accounted for. We need to pull 'the rent' - as a cost - out of the 'interest bucket' and put in back into the 'operating expense bucket'. This will decrease any ultimate interest rate charges reported. But it will decrease EBITDA as well, due to the extra cost of the rent. Nevertheless rent in any year is not exactly the same thing as 'lease interest'. We have to calculate annual rent from the operational accounts of the business, and that means looking at the cashflow statement. This I have done in the quoted post above, and calculated the rent to be $24m.

Furthermore the 'depreciation expense' under IFRS16 is now greater than it was. This is because there is now a new incremental element of depreciation - called the 'depreciation of right of use assets' (actually an IFRS16 accounting construct). Pre-IFRS16, total depreciation was less by this incremental amount. We must compensate for this smaller depreciation pre-IFRS16 if we are to compare today's EBITDA figures with yesterdays. This means for today's EBITDA to revert to the equivalent of the old EBITDA measure, we must increase today's EBITDA value by $15m (figure referred to in quoted post above), being the amount of this incremental depreciation.

With the adjustments in the above two paragraphs made, this means the EBITDA total reduces to:

EBITDA = $649m - $24m + $15m = $640m

I also need to make a complimentary adjustment to the denominator of my banking covenant, the 'Interest' divisor. Because 'lease expense interest' has been removed from the EBITDA figure quoted, to be consistent I also need to remove 'lease expense interest', from the divisor, because 'lease expense interest' is not interest in the pre IFRS16 sense.

For the interest bill I am using in this calculation (Ref AR2021 p41):

($153m - $1m) - $34m - $30m + $4m = $92m

Note that as well as ;lease interest expense', I have removed from the net interest bill:

(i) $34m of CIP securities 'notional interest'
(ii) $20m of 'lease expense' interest and $7m amortisation from a swaps reset and a further $3m undisclosed.

And I have added back a reduction in interest:
(iii) $4m from the ineffective portion of a cashflow hedge.

=> EBITDA/I = $640m / $92m = 7.0 > 2.75 => everything is A O.K.

2/ The second method is to use the EBITDA figure as quoted in the Annual Report. However in this case, the 'lease expired interest' that was equivalent to rent has not been removed. So to measure the ability of EBITDA earnings to cover any interest charges, we must make sure that those 'exaggerated earnings' are able to cover the consummately higher 'exaggerated interest bill' that includes 'lease expense interest' as part of the interest bill total.

EBITDA = $649m as reported.

I = $92m (as above) + $20m = $112m

=> EBITDA/I = $649m / $112m = 5.8 > 2.75 => everything is A O.K.

SNOOPY