Focus on the covenant that creates the decision point
A long covenant package does not necessarily give a lender meaningful protection. The central question is whether the documents create an early and credible point for engagement before liquidity or enterprise value has deteriorated beyond repair.
Definitions, baskets, cure rights, and reporting obligations determine that outcome more than the headline leverage threshold viewed in isolation.
Read flexibility as a system
Individual permissions may look modest while producing substantial flexibility in combination. Debt capacity, restricted payments, acquisitions, disposals, and EBITDA adjustments should be modelled together under plausible downside cases.
- Test how add-backs and synergies affect covenant headroom over time.
- Track baskets that grow, reload, or can be combined with ratio-based capacity.
- Review information rights for the data needed before a breach occurs.
- Ensure transfer and voting provisions support the intended lender group.
Prepare for amendment before pressure arrives
Sponsors and lenders benefit from identifying the likely amendment levers while the credit is performing. That includes the information required, the consent threshold, potential new-money priority, and the effect of any sponsor cure.
A covenant package should support intervention and negotiation, not rely on a theoretical enforcement right. Its quality becomes visible when performance weakens and the parties need an orderly way to preserve value.
Discuss the implications
Speak with our advisory team about how these considerations apply to your organisation or transaction.
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