medium · Corporate Credit Analysis covenants
A sponsor-backed LBO company has an 'Equity Cure' provision. After a bad quarter, EBITDA falls to $150M, causing leverage to hit 6.5x against a 6.0x covenant on $1.05B of debt.
If the sponsor injects $30M in cash as a cure, how is the covenant test recalculated?
- The $30M reduces debt to $1.02B, but EBITDA remains $150M
- The leverage remains 6.5x but the breach is waived
- The $30M is added to EBITDA, reducing the test ratio to 5.83x
- The $30M is multiplied by the leverage ratio to find the required EBITDA
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