Negotiating Credit AGreements with lenders

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3 questions. 

 

  1. In this covenant - lite era, what types of covenants are you guys seeing? Can u share some actuaal metrics. Both for upper and lower middle. 

  2. There are a few types of liquidity coverage (EBIT / Interest Coverage, EBITDA / Interest, EBITDA –Capex – Taxes / Interest). that can be set. Given the covenant-lite era, you can probably only pick one of these. How do you determine which type of liquidity ratio to lobby for as a PE sponsor? Are lenders willing to be flexible so long as any liquidity coverage is included in the indenture?

  3. Another common covenant is Debt / EBITDA. It’s also common to have some covenant cushions. Have you seen instances where sponsor makes/asks for calculations such that an EBITDA reduction implicitly increases debt? So say total debt is 100 and EBITDA is 50, debt / EBITDA is 2.0x. But because EBITDA is allowed to fall by 20%, that means the leverage should also be 20% greater and the covenant should be placed at 120 / 40 (3x) as opposed to  (100 / 40  = 2.5). Does this happen?

Comments (2)

 
Sep 16, 2020 - 1:29pm

I am in private credit, so I can answer from the lending side of things:

1.) Most prevalent deterioration in docs has been EBITDA add-backs, with some agreements asking for up to 40%.  Worse are the ones asking to carveout COVID impacts, although this is still the exception. 

 

2.) >90% of the deals we structure are EBITDA/Interest.  Just much more straight forward, and you dont have to deal with the sponsor gaming the numbers with D&A, Taxes, or Capex.  

 

3.) Not to be a dick, but I honestly have no idea what you are asking.  The purpose of the leverage covenant is to limit debt as it pertains to a certain turn of cashflows.  So it would be counter intuitive for cashflows to drop by 20%, and then to permit debt to grow by 20%.

"Sounds to me like you guys a couple of bookies."
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