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]”