Finance

Leveraged Finance Academy: Introduction to Leveraged Finance - 7 March 2023

Shearman & Sterling LLP

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Debt Covenant – How Does It Work Under Various Instruments? HIGH YIELD FACILITY B TERM LOAN PIK • Ratio Debt: Fixed charge coverage ratio of 2:1 with separate ratio (leverage ratio) for secured debt. Certain deals (principally TMT) only use leverage (no fixed charge coverage ratio) • Other standard carve-outs include: • Credit facility basket • Capital lease basket • Acquisition debt if FCCR gets no worse • General basket • Capital lease obligations • Contribution debt • Loans to managements • Intercompany • Limited Condition Acquisition: offers flexibility in calculations • Caps on Structurally Senior Debt • Debt can generally be reclassified • Ratio Debt (subject to a total leverage or fixed charge coverage ratio of 2:1) • Unsecured or secured notes or unsecured or secured loans in lieu of incremental debt (with pari passu secured loans subject to MFN protection) • Acquisition Debt with no limit if specified interest coverage or leverage ratio met or "no worse than" test • Other carve outs consistent with high yield • Debt can generally be reclassified • Limits on Additional Debt • Total leverage test • Step-up interest in the event of increased leverage • Limits on additional PIK Debt • Modified baskets, at least in relation to debt of PIK issuer (but not restricted subsidiaries) 20 The Debt Stack – Structuring and Incurrence Covenants

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