Analyzing Credit Agreements
When looking at credit agreements what are some things that one should be focusing on to make sure that you won’t be taken advantage of during the transaction.
I have an extremely limited credit background but would love to learn more if anyone could chime in here!
You mean from a lender's or borrower's perspective?
A few general thoughts:
1) Is there security? If so, over what? Can there be more senior secured debt?
2) Can additional debt be incurred? Does it have to me more junior debt or can it be more senior or the same seniority?
3) What financial covenants must be maintained (maintenance financial covenants) or met to incur additional debt (incurrence tests)? Depending on industry, common ones could include debt/EBITDA, EBITDA/interest, DSCR/FCCR, debt/cap, etc.
4) Can dividends or distributions be made, what investments can be made (based on a covenant or restricted payment test)?
5) Can assets be sold? How much in assets can be sold? What do you have to do with the money (can it be re-invested or do you have to pay down debt with it)?
6) What legal entities are involved (as borrowers, guarantors, restricted subsidiaries, etc.)?
7) Early repayment - is it allowed and is there a premium to repay early?
Each of these can be technical and nuanced, but these are some big categories that you would be looking at. Some of these can also interact to allow something that might not have been intended by the lender (e.g., google the J. Crew "back-door").
For a lender! For context this would be for a corporate credit shop as the lender/buyer of debt. Thank you so much for the detailed response, really appreciate it!
Okay. If you are looking more into the HY/leveraged space, you could pick up a copy of Leveraged Capital Markets (by Shenkman and Maxwell) and there are some HY guides from various law firms that might be helpful. If you are more IG, maybe something by Fabozzi? I was also looking for a short Moody's paper on how they assess the strength of bond indentures, but can't find it right now.
Adjustments to EBITDA
5 yrs ago: the answer would've been to focus on debt/liens incurrence, RP, permitted investments, asset sale, prepayment language.
Today: definition of required lenders and anything related to loan participation/assignment
Recommended reading:
LSTA's credit agreement guide.
Simpson Thatcher CA guide: https://www.stblaw.com/docs/default-source/cold-fusion-existing-content…
Simpson Thatcher covenants: https://www.stblaw.com/docs/default-source/publications/leveraged-finan…
Also look at Reorg's covenant analysis packs and if you have time, practice reading those docs and see how your understanding measures up to reorg. (or xtract, whatever your shop uses).
where can we get the full simpson thatcher CA guide because that is only 7 pages
2 words: cash leakage
rp's and rdp's
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