Covenant lite facilities
Produced in partnership with Neil Grant
Covenant lite facilities

The following Banking & Finance guidance note Produced in partnership with Neil Grant provides comprehensive and up to date legal information covering:

  • Covenant lite facilities
  • Overview
  • Terminology
  • Springing financial covenants
  • Beyond financial covenants
  • Trajectory of European covenant lite
  • Possible risks of covenant lite facilities

Overview

Covenant 'loose' and covenant 'lite' facilities provoke much debate in the leveraged finance market since they are perceived to indicate that debt markets are overheating and lending standards are declining. This Practice Note seeks to explain some of the key characteristics of recent covenant loose and covenant lite financings, consider how terms may evolve in the future and assess some of the risks investors in these facilities may be exposed to.

This Practice Note assumes a certain level of knowledge of leveraged finance terminology and documentation. For more introductory information on leveraged finance financial covenants, see Practice Note: Leveraged finance—financial covenants. For a introductory guide to acquisition finance, see Practice Note: Acquisition finance—introductory guide. The Glossary of acquisition finance terms and jargon may also be helpful.

Terminology

Traditional 'covenanted' facility

European leveraged facility agreements traditionally include a suite of financial covenants to monitor the borrower-group's financial performance against a base case financial model. The full suite typically comprises the following covenants:

  1. 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 is a measure of the group's indebtedness compared to its ordinary operating profit; the higher the ratio the more indebted the group and the greater the perceived risk of lending to it.