Covenant loose meaning

Overview This Practice Note outlines key characteristics of covenant loose and covenant lite financings and considers certain risks that investors in these facilities may encounter. It assumes a degree of familiarity with leveraged finance terminology and documentation. For introductory material on leveraged finance financial covenants, see Practice Note: Leveraged finance—financial covenants. For an introductory guide to acquisition finance, see Practice Note: Introductory guide to acquisition finance. The Glossary of acquisition finance terms and jargon may also be helpful... Terminology Traditional ‘covenanted’ facility European leveraged facility agreements have traditionally included a package of financial covenants designed to monitor the borrower‑group’s financial performance against a base case financial model. The full suite typically comprises the following covenants: Leverage — this is the ratio of the group’s total [net] indebtedness to its earnings before interest, tax, depreciation and amortisation ( EBITDA ). The leverage ratio gauges the group’s indebtedness against its ordinary operating profit; the higher the ratio, the more indebted the group and the greater...

This glossary sets out many of the expressions commonly used in the leveraged finance market. Words appearing in the definitions in bold are defined elsewhere in this glossary. For further banking terminology, please refer to the main Banking & Finance Glossary... Acquisition finance glossary—A Acceleration Acceleration is the formal action taken by the agent, on the instructions of the majority lenders, following an event of default, such as making a demand for early repayment of the loan. See Practice Note: Accelerating a loan for more information... Accordion feature/accordion facility An accordion, also called an incremental debt feature, is a mechanism in the facilities agreement that, provided specified conditions are satisfied (for example, pro forma compliance with a leverage test), permits those lenders under the facilities agreement who wish to do so to advance additional debt. The terms for that extra debt are typically captured in an increase notice. This accordion or incremental debt flexibility is different from structural adjustment, which usually requires the majority consent...

Financial covenants feature across many types of banking deal to monitor and assess the financial performance of the borrower company or group. This Practice Note outlines the role of financial covenants within leveraged finance. It covers: the meaning of financial covenants how financial covenants operate in leveraged finance transactions the covenant package typically used on a classic leveraged finance transaction the methods for testing financial covenants other applications of financial ratios, and equity cure, mulligan and deemed cure provisions See the Glossary of acquisition finance terms and jargon for definitions of certain expressions used in this Practice Note. What are financial covenants? Undertakings (also called ‘covenants’) are promises from the borrower (and sometimes other members of the borrower’s group) to the lender about carrying out, or refraining from, particular actions. Financial covenants are a distinct category of covenant or undertaking. They are commitments to achieve or maintain specified financial thresholds. Financial covenants allow the lender to...