medium · Private Credit documentation-covenants-terms
A borrower has a 'Covenant-Lite' loan structure with an 'Incurrence-Based' leverage test of 6.0x. The company's leverage currently sits at 7.5x due to a significant EBITDA decline.
Is the company in default?
- No, unless the company attempts to take a specific restricted action like issuing new debt or paying a dividend.
- No, because incurrence covenants are structurally designed to test only interest coverage, not leverage.
- Yes, because any breach of the negotiated leverage ratio automatically constitutes an Event of Default under the loan.
- Yes, but only if the revolving facility's separate springing maintenance covenant component happens to be activated first.
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