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Legal Resources

Covenant Tip
19 June 2019 5:50 pm Sabrina Fox

ELFA Covenant Tip #2

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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Covenant Tip 12
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Covenant Tip 6
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Covenant Tip 5
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Covenant Tip 4
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Covenant Tip 3
20 June 2019 3:30 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.