Some covenants provide borrowers with the flexibility to designate undrawn credit facility commitments as having been “incurred” under an applicable ratio or grower basket, rather than calculating capacity for that debt or lien at the time of draw down. In this ELFA Covenant Tip, we explain the “Designated Commitments” concept, the risks it presents, and where to find it.
The provision allows the issuer to opportunistically calculate debt capacity, and then obtain or increase commitments, when it is favourable to the company (such as, for example, just before EBITDA is forecasted to decline).
The presence of this flexibility may make it difficult for investors to estimate debt and liens capacity; in fact, in some formulations, the designation can be revoked if it would be in the issuer’s interest to do so (say, because EBITDA is increasing).
To determine if an issuer can avail itself of this flexibility, ctrl-F for “Designated Commitments” or “Reserved Indebtedness Amount” – the provision is usually described in a paragraph following the litany of debt baskets in the debt covenant.
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