easy · Corporate Credit Analysis
Summit Holdings is a sponsor-backed company that breaches its leverage covenant. The sponsor exercises an 'Equity Cure' by contributing $40M in cash.
If the agreement uses the standard 'EBITDA add-back' approach, how does this affect the covenant test?
- The $40M must be applied as a permanent, mandatory paydown of the Term Loan B principal.
- The $40M is added to the trailing twelve-month EBITDA for the purposes of the leverage calculation.
- The contribution instead reduces the net debt figure used in the leverage ratio's denominator.
- The covenant gets waived outright for two consecutive quarters following the equity contribution.
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