Is it common for the sponsor to negotiate whatever covenants he is comfortable with as a part of the package are those mostly dictated by the lenders? By general basket, iN the credit world, does it mean restricted payment basket or something else completely? Why are lenders usually not willing to allow equity cures / infusions or does the behavior / reception vary by direct lenders and private credit lenders?

2-way street, there is negotiation involved, but usually ends up being a compromise There are 2 main basks: builder basket and grower basket; restricted payment basket is a sub segment where ex. if you have availability under you builder basket you can make a restricted payment, dividend, pay down unsecured debt, make a capex investment, etc subject to no event of default, pro-forma compliance with the overall leverage test, etc. Lenders are willing to allow equity cures, at least in the private credit world. Usually no more than 4-6 during the holding period and no more than 2x consecutively

In more upper market deals, it often does become unlimited. However, think about it from the lenders point of view. If a company keeps tripping its covenants and defaulting and the loan documentation allows for unlimited equity cures, how are you going to get back at the table so you can take action against the borrower? Doesn't make sense from a lender point of view; it's analogous to putting a poster over a giant hole, the problem doesn't just magically disappear.

Because leverage metrics end up being understated when you have a substantial amount of EBITDA add backs and the definition of EBITDA is fundamental in many ways from determining the size of the financing package and ties into covenant levels, RP/basket sizing, etc. Not all EBITDA adjustments are controversial though, things like stock-based comp, non-cash impairment charges, transaction expenses are usually viewed with less scrutiny.

Private Credit Questions

loanboy043

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thanks @Regularfreak" ! 1) Creating an online course(s), in this space, including: Leveraged Finance 2.0: Advanced Course - Doc Negotiation, Aggressive vs. Market Terms-- =which answers some of these questions such as EBITDA Add-backs, fees, market flex, MFN, incremental, negative covenants, RPs, etc with common examples. And I added to the outline a Doc Negotiation Case Study. Stay tuned. Working on getting the 1.0 course live 1st tho. Would love any ideas, feedback on what courses ppl want, or topics 2) EBITDA Add-backs - send me your email i'll send you some published materials from legal firms on this topic..here's some below. lemme know if thats enough or u need further clarification w/ real examples

Synergising synergies - Introduction The definition of EBITDA has always been a fundamental negotiation point in the leveraged finance market; ultimately, a legal construct as opposed to one derived from any recognised accounting standard. In recent years, however, negotiation has increasingly focussed on the scope of EBITDA add-backs, particularly synergies and cost-savings, with sponsors demanding greater flexibility to increase EBITDA quantums. However, some market participants are concerned that the pendulum has swung too far and that such add-backs may simply conceal increased leverage. The following discussion seeks to shed light on such synergies and cost-savings, analysing how such discussions are no longer confined to the top-tier (or large-cap) arena, having slowly permeated the mid-market space and finally, touching on some of the key concepts in leveraged facilities agreements that are impacted as a result.

Why EBITDA? Cash Flow Lending •Lender is focused primarily on Cash Flow in making credit decision (secondary focus on assets) •Most Common Cash Flow Ratios: •Fixed Charge Coverage Ratio •Leverage Ratio •EBITDA is a modified Cash Flow calculation that gauges recurring operational strength. •EBITDA is more “comparable” when evaluating different companies than cash flow from operations, which is impacted by several factors that differ across companies (interest, tax, working capital). •EBITDA is viewed as best proxy for cash-generating power on a comparable basis. •EBITDA measurement is backward looking and generally covers past twelve months. This “flattens” the numbers so that companies with seasonal businesses can stay in compliance.

EBITDA 101 – The Basic Add-Backs •The gimmes: •By definition: Interest / Tax / Depreciation / Amortization •Current transaction fees and expenses (can be capped and have an incurrence time limit) •Non-cash charges (in addition to depreciation/amortization) but not accruals •The asks: •Equipment lease payments (the portion that is equivalent to interest payments on financed equipment) •Extraordinary, unusual or non-recurring losses •Future fees and costs in connection with Permitted Acquisitions, Permitted Dispositions and Permitted Debt •Future amendment fees •Management fees •Restructuring and integration expenses •Realized or anticipated cost savings (“synergies”)

3) Capex - i'll let someone else maybe weigh in? but normal syndicated loans definitely dont just convert to equity.

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