Operational covenants 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...

Real estate finance is a type of secured lending. Some motivations for taking security in a real estate finance deal mirror in practice the general benefits of security seen in commercial lending (see Practice Note: Difference between security and quasi-security—Why take security and/or quasi-security?). However, security assumes heightened significance here because the borrower is commonly a special purpose vehicle (SPV) (also referred to as a special purpose company or SPC) incorporated solely for the contemplated transaction (that is, to acquire, or to acquire and develop, a property). Consequently, the borrower will lack an operational track record and its assets will be limited to the property itself and, where relevant, the development of that property. See Practice Note: Introduction to real estate finance—the lending structure—Borrower entities in real estate finance transactions. Due to the SPV structure, a lender’s assessment of the borrower’s standalone credit risk typically carries less weight in real estate finance than under a conventional corporate loan. One method by which the borrower can strengthen its credit profile...

This Practice Note outlines key aspects of a documentary 'relaxation' or 'release' clause, commonly included in leveraged buy-out (LBO) facility agreements. It also considers: the most frequently encountered trigger conditions common ways of easing requirements within the facility agreement, and particular points to address when negotiating this clause This Practice Note assumes a degree of familiarity with leveraged finance structures and documentation. For introductory material, see Practice Notes: Introductory guide to acquisition finance and Introductory guide to leveraged finance facilities agreements. The Glossary of acquisition finance terms and jargon may also be useful. Background Traditionally, LBO facility agreements have placed strict limits on group activities and imposed rigorous mandatory prepayment obligations, reflecting high leverage. Private equity sponsors often contend that, while controls are appropriate when the balance sheet carries significant leverage, once the group has materially deleveraged, such tight constraints become unnecessary. Deleveraging can occur through: a combination of earnings before interest, taxes, depreciation and amortisation (EBITDA)...