Calculating Covenant Capacity – It’s Complicated…But Not Impossible
One of our most popular modules in our Leveraged Finance Covenant Training course is the chapter on Calculation Mechanics. The topic is also most often requested for deeper learning, case studies and expert input, so we’ve decided to make it the focus of our upcoming Autumn in-person event, taking place on 27th September at The Ned.
Our course spells out the essential steps that students must follow to get anywhere near an accurate calculation of covenant capacity (hint: there are six of them!). We pay particular attention to the newest covenant of the bunch, the Financial Calculations covenant, which must be analysed in step one.
This covenant contains flexibility for a borrower to do most– if not all – of the following:
- Adjust the fixed amount of a basket upwards inline with the EBITDA grower, with no obligation to adjust back down
- Deduct debt under RCFs and incurred for working capital purposes from the debt figure of any ratio calculation
- Make calculations at almost any point in time that could – in management’s sole discretion – be related to the transaction in question
- Use the last quarter’s EBITDA and multiply it by our for an annualised figure that can be used in ratio calculations and soft-caps
- Carry back – and forward – amounts made available under annual baskets
The material also warns that even when students have settled on an approximate figure, it should still be discounted for accuracy due to the significant amount of discretion management have to decide when and how to make calculations under the covenants.
This is most clearly demonstrated with EBITDA add-backs, which have become legendary in their inflation. During the live event next week, we will review actual EBITDA add-backs made by borrowers during the pandemic, just to get a flavour of the art of the possible.
As with anything covenant-related, this might sound complex(and it is!), but trust me when I say that it is absolutely not impossible. Join us next week to empower yourself with the knowledge currently held by just a handful of finance lawyers, and discover for yourself the accessibility of legalese.