Leveraged finance—financial covenants

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Leveraged finance—financial covenants
  • Coronavirus (COVID-19) and financial covenants
  • Traditional financial covenants v covenant lite
  • Leveraged financial covenants—getting started
  • What is the base case model and why is it important?
  • Drafting financial covenants
  • Leverage covenant
  • Leverage ratio
  • Total [Net] Debt
  • More...

Leveraged finance—financial covenants

Financial covenants are used on a wide range of different kinds of banking transactions to monitor and test the financial performance of the borrowing company or group.

This Practice Note explains the use of financial covenants in a leveraged finance context. It explains:

  1. the covenant package traditionally used on a traditional leveraged finance transaction

  2. what is meant by covenant lite and covenant loose

  3. how financial covenants are tested

  4. other uses of financial ratios, and

  5. equity cure, mulligan and deemed cure provisions

For information on financial covenants more generally, see Practice Notes: Financial covenants—principles and Common financial covenants. For information on use of financial covenants in specific types of finance transactions (including leveraged), see Leveraged finance—financial covenants—Financial covenants in finance transactions—further information.

Coronavirus (COVID-19) and financial covenants

For information on the impact of coronavirus (COVID-19) on leveraged finance financial covenants, see News Analysis: Assessing the impact of coronavirus (COVID-19) on leveraged finance financial covenants and COVID-19 and the impact on financial covenants (2020) 5 JIBFL 337.

Traditional financial covenants v covenant lite

Due to the higher risk profile, leveraged finance facilities agreements traditionally included a full financial covenant package comprising:

  1. a debt or senior debt to earnings ratio (leverage/senior leverage covenant)

  2. a cashflow to debt service ratio (cashflow cover covenant)

  3. an earnings to interest/senior interest ratio (interest cover covenant), and

  4. a limit on capital expenditure


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