Equity Cure Rights In Commercial Loan Transactions: Curing Financial Covenant Defaults

Description

Equity cure rights give the borrower (specifically the sponsor) the right to increase its calculated EBITDA through an equity contribution. This right becomes relevant when the borrower has failed to satisfy one or more of its EBITDA-based financial covenants.

The equity cure right allows the sponsor to avoid the time and expense of seeking a default waiver or forbearance, paying waiver and amendment fees to the lender, and being forced back to the table to renegotiate the basic terms, conditions, and economics of its existing loan agreement. But cure rights must be carefully drafted to address the impact on the loan and the borrower.

The equity contribution will most often be implemented by the issuance of preferred equity with maturity after the maturity of the credit facility or a capital contribution based on existing equity held by the sponsor. Default is deemed to exist during the period when a cure notice is delivered to the lender and the required contribution is made. The lender agrees to forbear from exercising remedies or applying any default interest rate during this period.

Certain restrictions and limitations apply. Cash proceeds of an equity cure must sometimes be used to prepay the credit facility. The sponsor can only contribute the amount necessary to cure the covenant breach. Furthermore, the equity cure amount may be limited to an overall percentage of EBITDA. There are also limitations on the number of times that the cure right can be used during the term of the credit agreement.

Listen as our authoritative panel discusses equity cure rights, their interaction with EBITDA and other financial loan covenants, and particular concerns of borrowers and lenders.