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
| +416 | Is UBS really that bad? | 76 | 40m |
| +259 | Investment Banking is Divine | 40 | 2d |
| +219 | Another $115bn Mega deal for these banks. Congrats! | 46 | 5h |
| +216 | US 2027 SA IB worried about background check | 53 | 2d |
| +54 | Useless associates | 11 | 4h |
| +48 | Differences in Restructuring Teams? | 24 | 1h |
| +40 | Is Houston SA 28 recruiting already over? | 34 | 1d |
| +36 | How do you manage nerves in IB technical interviews? | 8 | 8h |
| +34 | FIG Pigeonholes you - is it true? | 13 | 1h |
| +34 | Roku-Fox Deal - UBS Misses Out on yet another deals after years chasing this deal | 6 | 34m |
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
Et qui corrupti sunt veritatis magni fugit. Nesciunt accusantium officia consequatur ipsa accusantium totam iusto. Eligendi id veniam corporis architecto. Cumque quos a exercitationem eveniet tempore et quibusdam explicabo.
Fugit commodi officia qui reiciendis doloribus ut veritatis. Veritatis modi iste laudantium iure ut aut. Repudiandae consequatur saepe nobis in ullam.
Ut fugit rerum at illo. Sapiente quis pariatur inventore natus eos quae. Enim eum sit et ea consequatur. Maxime sunt consequuntur sit minus temporibus alias suscipit autem.
Praesentium aliquam deleniti consequatur dolor et molestiae aliquid. Error sunt ipsa magni atque. Nobis distinctio deleniti quis minima ab. Enim perferendis adipisci nesciunt eum nam est inventore. Non exercitationem sed voluptatem veniam.
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...