Negotiating Credit AGreements with lenders

3 questions. 


  1. In this covenant - lite era, what types of covenants are you guys seeing? Can u share some actuaal metrics. Both for upper and lower middle. 

  2. There are a few types of liquidity coverage (EBIT / Interest Coverage, EBITDA / Interest, EBITDACapex – Taxes / Interest). that can be set. Given the covenant-lite era, you can probably only pick one of these. How do you determine which type of liquidity ratio to lobby for as a PE sponsor? Are lenders willing to be flexible so long as any liquidity coverage is included in the indenture?

  3. Another common covenant is Debt / EBITDA. It’s also common to have some covenant cushions. Have you seen instances where sponsor makes/asks for calculations such that an EBITDA reduction implicitly increases debt? So say total debt is 100 and EBITDA is 50, debt / EBITDA is 2.0x. But because EBITDA is allowed to fall by 20%, that means the leverage should also be 20% greater and the covenant should be placed at 120 / 40 (3x) as opposed to  (100 / 40  = 2.5). Does this happen?

 
Most Helpful

I am in private credit, so I can answer from the lending side of things:

1.) Most prevalent deterioration in docs has been EBITDA add-backs, with some agreements asking for up to 40%.  Worse are the ones asking to carveout COVID impacts, although this is still the exception. 

2.) >90% of the deals we structure are EBITDA/Interest.  Just much more straight forward, and you dont have to deal with the sponsor gaming the numbers with D&A, Taxes, or Capex.  

3.) Not to be a dick, but I honestly have no idea what you are asking.  The purpose of the leverage covenant is to limit debt as it pertains to a certain turn of cashflows.  So it would be counter intuitive for cashflows to drop by 20%, and then to permit debt to grow by 20%.

"Sounds to me like you guys a couple of bookies."
 

Billy Ray -- Many thanks for responding. Would apppreciate if you can respond to my follow ups:

1) How do you as lenders determine what add-backs make sense (other than the obvious one-time / non-recurring costs?)

2) I get the point about keeping it straightforward, but would still like to hear your thoughts on when other types of liquidity ratios may be more relevant to set?

3) This was new to me too. On one of the transactions where we were co-investing with a family office (that belongs to an ex-senior partner from a top megafund), he raised this point to our team...which made me think whether this is a negotiating tactic that some megafunds use to set a higher leverage ratio 

 

Credit Agreement - hey OP - how familiar/comfortable are you with a Credit Agreement? Do you know how to find info in any given Credit Agreement using CTRL-F  / TOC (pricing, financial cov, amort, lender commitment schedule - if applicable)?  https://www.sec.gov/Archives/edgar/data/1164863/000114036119017210/ex10…

Or - are you unfamiliar, and want someone to walk you through how to analyze a CA / where to find info, and get reps with different examples so you can learn? If so, perhaps re-visit asking questions when you have a greater working knowledge of the legal doc.  Happy to help and send you some stuff.

 

Thanks loanboy, I am familiar and am just looking for answers to the questions I posed above. Pls could you chime in if you're able to offer perspective. 

 

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