hard · Corporate Credit Analysis
A credit agreement defines its leverage-based 'springing' financial covenant to be tested only 'if Revolving Exposure exceeds 35% of Revolving Commitments as of the last day of any fiscal quarter,' and expressly excludes up to $25M of undrawn-but-issued letters of credit from Revolving Exposure for this test. Revolving Commitments are $200M. At quarter-end the borrower has $60M drawn and $30M of issued undrawn LCs.
Is the covenant tested this quarter?
- Yes, because total Revolving Exposure of $90M is 45% of commitments, clearly above the 35% springing trigger threshold
- No, because after the $25M LC carve-out, included Revolving Exposure is $65M, which is 32.5% of $200M and below the 35% trigger
- Yes, because letter-of-credit exposure can never be excluded from a springing covenant test once the LCs are issued and outstanding
- No, because the borrower can simply repay the revolver before the measurement date, making the question of the carve-out irrelevant to capacity
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