Check out our courses and career prep resources today. , Incurrence Covenants for High Yield Bonds, Sell Side Handbook Predicts… Stonks in 2021, risk mitigation for the senior secured lenders. Lien covenants in high-yield indentures typically permit issuers to pledge collateral or otherwise incur liens to secure debt or other obligations, but only to the extent an issuer equally and ratably secures the bonds under the indenture with the same collateral, subject in each case to a combination of standard and highly negotiated exceptions. However, these pro forma disclosures need not comply with Regulation S-X under the Exchange Act, instead the typical formulation of the covenant will require explanatory footnotes, which take on greater importance in this context. Maintenance Versus Incurrence Tests Maintenance and incurrence tests are two categories of covenants that require a borrower to adhere to certain financial metric limits. „Negative covenants limiting voluntary activities by the loan parties such as incurring indebtedness, selling assets, making investments or acquisitions, paying dividends or prepaying or repaying other indebtedness. Incurrence Covenants: • Company cannot take on more than $2 billion of total debt. Typically, the leverage ratio requirement would be tested as at the time that the action actually occurs (e.g., on the date of incurrence of the relevant debt). • Company cannot make acquisitions of over $200 million in size. Diese Finanzkennzahlen werden zwischen dem Kreditgeber und dem Kreditnehmer vereinbart und in regelmäßigen Abständen kontrolliert. The looser incurrence style negative covenants that are often included in cov-lite loans enable the borrower to engage in other transactions (such as acquisitions) without having to worry about seeking lender consent, paying consent fees or being unable to obtain the necessary consent. Aus Sicht der Banken haben die Covenants eine Warnfunktion, denn das Brechen der Covenants signalisiert, dass der Geschäftsverlauf nicht … * Frequently used tests for maintenance covenants are … Some typical covenants include minimum cash on hand, working capital ratio (current assets divided by current liabilities), or quick ratio (ratio of current assets minus inventories, divided by current liabilities). Typical financial covenants include: minimum earnings before interest, taxes, depreciation and amortization (EBITDA) minimum interest coverage (the ratio of EBITDA to interest expense) minimum fixed-charge coverage (the ratio of EBITDA to interest expense, plus scheduled principal amortization, plus capital expenditures, plus cash taxes) Maintenance tests, which are typically found in leveraged loans, require that a company maintain compliance with financial metrics in order to avoid defaulting on its debt. • Company cannot make acquisitions of over $200 million in size. „Mandatory prepayments from the borrower from asset sales, excess cash flow and certain other events. Question: Question 14, Financial Maintenance Covenants Are Typical For _____, While _____ Typically Have Incurrence Covenants. • Senior Debt / EBITDA cannot exceed 2.0 x Incurrence covenants are tested for a specific event, such as when a borrower wishes to take out more debt. A bond covenant is a legally binding term of an agreement between a bond issuer and a bondholder, designed to protect the interests of both parties. High-yield covenants are instead "incurrence" covenants, which means that they bar the issuer from engaging in certain activities or taking certain actions except under designated circumstances. • Total Debt / EBITDA cannot exceed 3.0 x • Proceeds from any asset sales must be earmarked to repay debt. Incurrence covenants will take over from maintenance covenants as soon as high yield market participants learn the difference. Incurrence Covenants: An example of a financial covenant is when a borrowing company agrees to maintain (staying above or below) an agreed ratio, typically financial ratios such as the interest coverage ratio, total assets to debt ratio, or debt to equity ratio. Instead, the high-yield covenant package includes incurrence covenants, which require the Issuer (and its Restricted Subsidiaries) to take some action, such as incur indebtedness, pay a dividend or make an investment, in order to be trig-gered. loans. • (EBITDA – CapEx) / Interest Expense cannot fall below 2.0 x. Maintenance Versus Incurrence Tests Maintenance and incurrence tests are two categories of covenants that require a borrower to adhere to certain financial metric limits. • (Total Cash Payable Debt + Capitalized Leases) / EBITDAR cannot exceed 4.0 x typically no collateral is required unsecured financial covenants on a from RSM 430 at University of Toronto • EBITDA / Interest Expense cannot fall below 5.0 x Debt covenants are not used to place a burden on the borrower. • Company cannot spend more than $100 million on CapEx each year. •Incurrence: Borrower must not take an action that pushes a financial ratio beyond a specified level. 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