medium · Debt Capital Markets credit-ratings-risk
A borrower has a 6.0x maintenance covenant. It has $600 million in Total Debt and $110 million in EBITDA.
If the company issues an additional $100 million in debt to fund a share buyback, what happens to its compliance?
- It breaches the covenant because EBITDA was not adjusted for the buyback.
- It remains compliant because buybacks are usually permitted under debt incurrence tests.
- It remains compliant with a 6.36x ratio.
- It breaches the covenant as leverage rises to 6.36x.
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