Lev fin: Springing covenants vs incurrence covenants
Basically the title - bit confused are these the same.
Are springing and incurrence covenants the same?
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No. Incurrence covenants are things like limitations in debt, liens, restricted payments (think dividends), and investments.
Springing covenants are financial covenants that only apply if certain conditions are met. An example would be a revolver with a leverage ratio covenant that is tested (i.e. springs) if utilization is above a certain %.
thank you, that is helpful
why do we not see springing covenants in term loans as I see them frequently in rcfs?
Mainly a difference in the types of lenders involved in revolvers vs. term loans. In the cov-lite days, TLB buyers (institutional clients) decided they could live without financial covenants. The banks in the revolvers somewhat followed suit by opting for springing financial covenants (but were often unwilling to have no financial covenants at all).
In the instance of a financial covenant that springs based on utilization, it sort of makes sense to protect yourself against a distressed borrower drawing down on your revolver pre-BK.
Not sure I agree with the other answer. Springing covenants by definition cannot apply to a term loan because TLB is fully drawn day-1 so there’s nothing to “spring”. You will see springing only in RCFs above 40% utilisation (no reason why but that’s the “standard”).
thank you
do super senior rcfs also have this springing covenant structure?
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