how are financial covenants determined typically? i know many times, it's set at 20-25% headroom to bank case projection, but wonder if there are deeper science behind it - leverage - interest coverage - debt service coverage - other
in addition, what are the considerations when it comes to determining margin grid and grid for mandatory prepayment (e.g. ecf sweep, ipo proceeds, etc)?
appreciate any comments. thanks
| +138 | Restructuring: Anti-climactic Experience | 36 | 7h |
| +110 | IB Net Worth / Savings Check | 51 | 7h |
| +100 | Woman who emptied Knicks trashcan on street then stole it was DEI exec, worked at JPMorgan Chase | 25 | 5h |
| +82 | Stop sleeping on UBS - it’s pretty good | 29 | 41m |
| +70 | Hot take: I’d rather be at Desjardins than UBS for investment banking in 2026 | 11 | 25m |
| +56 | 2026 VAULT PRESTIGE RANKINGS | 30 | 1h |
| +39 | AI + Financial Modelling | 12 | 1d |
| +32 | Hardest interview experiences? | 20 | 1h |
| +28 | Summer before college | 17 | 19h |
| +26 | Current State of UBS in North America | 8 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
It's typically set at a 30% cushion. Most sponsored deals will only have one financial maintenance covenant (if any).
ECF grids will start at 50%. Sometimes they flex to 75% if the deal is struggling. Stepdowns depend on the credit and closing leverage, but 0.5x-0.75x is ballpark. ECF definitions have become so gutted in recent years that this provision is more form over substance imo.
thanks for this.
overall, sounds like these are more art than science and based on market normal vs. some rigit rationale.
Intuitively, the cushion to a leverage maintenance covenant is just how much % you're okay with earnings/ebitda declining from the earnings profile at the origination of the loan before you want the borrower to be back at the negotiation table.
Coverage ratios, not much particular rationale there besides it should ideally be greater than 1x...
Mlamb is correct. 25-30% cushion. FCCR is typically 1.20x but can go down to 1.10x
Banks are going to be in the 3-4x leverage. Above 4x and it’s FinCo.
I haven’t seen an interest coverage. Mainly senior/total, FCCR and capex from time to time.
Covenants are getting butt fucked nowadays. Expect covenant lite and low to non existent amort in the BSL market.
Only time I really see interest coverage is in the incurrence test for unsecured debt.
As TNA said, documentation in the BSL market has become very borrower-friendly over the past 2-3 years
Doloremque molestiae autem ad enim et adipisci. Reiciendis dignissimos ducimus distinctio ut. Molestiae vitae minima est blanditiis eos. Ex ullam tempore neque ut autem earum. Consequuntur nesciunt fugiat et possimus sed. Voluptate omnis at saepe. Temporibus dolorum facilis sit sit vel.
Earum aut nisi repellat quia rerum a deserunt repellendus. Et at illo ea omnis. Ex quas cupiditate tenetur et qui. Repudiandae neque quasi ab quia facere.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...