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.
Other baskets that can often be secured include the credit facilities debt basket, the acquisition finance basket, the contribution debt basket, the hedging basket, the capex basket, and the general debt basket.
To determine what potential secured debt capacity an issuer has, look at the definition of “Permitted Collateral Liens” in a secured deal, or “Permitted Liens” in an unsecured deal, and follow the cross-references to the Debt covenant to gauge the “real” level of potential secured debt.