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
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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
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