hard · Corporate Credit Analysis covenants
A leveraged credit agreement contains a springing financial covenant: a maximum first-lien net leverage ratio of 6.0x that is tested only when revolver utilization (excluding undrawn letters of credit up to $30M) exceeds 35% of the $400M revolver commitment at quarter-end. At Q-end the borrower has $180M of revolver borrowings, $40M of issued letters of credit, and first-lien net leverage of 6.4x.
Is the covenant breached?
- Yes, because total revolver exposure of $220M ($180M drawn plus $40M of LCs) is 55% of the $400M commitment, tripping the 35% threshold, and 6.4x exceeds the 6.0x maximum
- No, because the covenant tests average rather than quarter-end utilization, and the borrower can repay before the determination date to keep average usage under 35%
- No, because counted utilization is $190M ($180M plus the $10M of LCs above the $30M carve-out), which is 47.5% of $400M and trips the test, but 6.4x is within the cushion of a 6.0x covenant tested at 1.067x tolerance
- Yes, because counted utilization is $190M ($180M drawn plus the $10M of LCs exceeding the $30M carve-out), which is 47.5% of the $400M commitment, exceeding 35% and activating the test, and 6.4x breaches the 6.0x maximum
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