Shearman & Sterling LLP
Issue link: https://digital.shearman.com/i/1494417
Debt Covenant – Basics 17 Purpose • Limit additional debt unless cash flow is sufficient to service all debt obligations including proposed new debt or a certain level of leverage is maintained • Control structural subordination Prohibits Issuer and Restricted Subsidiaries from incurring debt except for: • Ratio Debt • Permitted Debt – if the Issuer does not have capacity under the ratio, then it can take advantage of certain specified exceptions that are available to it regardless of whether it meets the ratio test (e.g., general basket, credit facilities basket and others) Focus on who can incur the debt? Types of Ratio Test permitting the incurrence of Ratio Debt: • Fixed Charge Coverage Ratio: EBITDA / all Fixed Charges (interest expense and dividends) • Leverage Ratio: Total debt / EBITDA The Debt Stack – Structuring and Incurrence Covenants