Liquidity options under European cov-lite facilities

In covenant-lite transactions, the absence of ongoing financial maintenance covenants, which have traditionally operated as the trigger for a debt restructuring, means that it is the lack of sufficient liquidity which will instead be one of the more likely factors leading to the commencement of a restructuring process. It has long been said that cash is king and access to liquidity will therefore be crucial to the financial sustainability of many highly-leveraged businesses given the extremely uncertain macroeconomic context. It is for this reason that the liquidity options available under the terms of a borrower’s existing leveraged facility documentation is currently a key area of focus for both financial sponsors and their creditors.

There is a multiplicity of factors to analyse when considering whether there is scope to raise additional debt in the context of a covenant-lite leveraged facility and the ranking and recourse that can be offered to the indebtedness incurred. This note highlights some of the key issues in leveraged facility documentation to be analysed by financial sponsors and their creditors when considering available liquidity options in circumstances where satisfaction of a financial ratio test may not be feasible.

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