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Legal Resources

Covenant Tip
24 June 2019 11:39 am Sabrina Fox

COVENANT CALCULATIONS, DEBT INCURRENCE, RESTRICTED PAYMENTS

Most covenant ratio tests allow the issuer to ignore debt incurred under permitted debt baskets on the calculation date. This allows issuers to, on the same day, raise maximum debt under the ratio before using the baskets. This is logical as the same result could be achieved by incurring ratio debt one day and permitted debt the very next day.

This exclusion can create issues however where the ratio is used for actions other than debt incurrence. The Consolidated Leverage Ratio is also used to govern dividends, to calculate the acquired debt basket, to size certain permitted investment baskets, and in calculating portability.

This could lead to unexpected outcomes: for example, issuers have the ability to debt-finance dividends using permitted debt baskets where actual leverage is higher than the specified maximum leverage level.

To find this flexibility, look in the last paragraph of the “leverage ratio” definition for the proviso “pro forma effect shall not be given to (1) any indebtedness incurred on the date of [calculation] / [determination] pursuant to the second paragraph of the [debt covenant]”

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Covenant Tip 12
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Covenant Tip 11
12 December 2019 6:48 pm Sabrina Fox
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Covenant Tip 10
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Covenant Tip 6
21 June 2019 3:48 pm Sabrina Fox
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Covenant Tip 5
21 June 2019 2:20 pm Sabrina Fox
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Covenant Tip 4
20 June 2019 3:44 pm Sabrina Fox
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Covenant Tip 3
20 June 2019 3:30 pm Sabrina Fox
ELFA Covenant Tip #3

Some covenants will allow issuers to access potentially significant dividend capacity even while the issuer is in default. In this ELFA Covenant Tip, we explore the decline of the no default blocker in the Restricted Payments covenant. This feature is one of a suite of provisions included in recent deals that preserve flexibility under the covenants even when the issuer might be in distress – in this case, owners could access dividend capacity even after the issuer misses a coupon payment.

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Covenant Tip 2
19 June 2019 5:50 pm Sabrina Fox
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Covenant Tip 1
19 June 2019 5:22 pm Sabrina Fox
ELFA Covenant Tip #1

The secured debt leverage ratio typically does not impose an aggregate cap on secured debt capacity in a high yield bond covenant package. In this ELFA Covenant Tip, we explain how to measure an issuer's potential secured debt capacity. In addition to the secured debt leverage ratio, a high yield issuer is often able to secure several other material debt baskets - which means that total secured debt capacity is likely materially higher than where the secured debt leverage ratio is set.

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