medium · Debt Capital Markets credit-ratings-risk
A borrower is in compliance with their 6.0 × springing maintenance covenant at quarter-end with a leverage of 5.8 ×. However, their EBITDA included a one-time gain of $10 million from the sale of an old factory.
If the credit agreement defines EBITDA as 'Recurring Operating Income,' what is the risk to the borrower?
- The borrower will be forced to use the $10 million to pay down the revolver, which would lower their leverage anyway.
- There is no risk, as EBITDA is a standard GAAP term that always includes all gains and losses.
- The $10 million gain may be excluded from EBITDA, potentially pushing the leverage ratio above the 6.0 × limit.
- The lenders will increase the springing threshold to 7.0 × to reward the borrower for the successful sale.
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