A Cautionary Tale of Two Words
Leveraged finance investors face a tough task when analysing modern covenant packages, and nothing illustrates this better than the disappearance of just two words from the Restricted Payments covenant.
One trick of the trade for those tasked with finding documentary risk quickly is this: identify a recent precedent for the deal you’re reviewing and run a comparison (we call this a blackline) against prior deals.
With just a few keystrokes you’ll find 75% of what you need to know about the new deal. The strikethroughs (for deletions) and underlines(for additions) are where the bodies are buried.
In this particular instance, the deletion of just two words– “default or” – meant that the borrower could pay dividends for a full month after missing a coupon payment.
"default or"
You don’t need to know much about traditional capital structure priorities to understand how backwards this is – in the proverbial stakeholder queue, equity always gets paid after debt, and there is no right more sacrosanct to a lender than getting paid interest on sums loaned.
Given modern deal timelines and the reams of paper the typical credit analyst must review, how is it possible for them to identify minor adjustments with major implications?
The secret is to know where to look.
That’s what our Leveraged Finance Covenant Training is all about – our course creates a framework for covenant analysis so leveraged finance professionals know where to find the most important provisions, the ones reflecting the most critical protections. With that framework in place, you’re far more likely to notice when something important is missing.
One a brighter note, we have another important message from for you, and it also comes in just two words – Happy Holidays! From everyone at FLT, we wish you all the best for a restful holiday season and a very happy New Year.
What better gift to give your team this holiday season than the newest levfin super power – finding that two-word needle in a complex covenant haystack.
We’ll be here through the holiday season if you’d like to see a demo of the platform, or watch our taster course.
We look forward to speaking with you.
Sabrina and the FLT Team