medium · Debt Capital Markets
In a springing covenant structure, why might a lender exclude 'Letters of Credit' from the utilization calculation used to trigger the test?
- Because LCs have a higher priority in a bankruptcy waterfall than cash revolver draws.
- To encourage the borrower to use LCs instead of cash to hide their true leverage from the public markets.
- Because LCs are considered equity rather than debt under standard accounting principles.
- To allow the borrower to perform ordinary course business activities, like posting LCs for rent or insurance, without triggering a full leverage audit.
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