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

Recording of a 90-minute premium CLE webinar with Q&A


Conducted on Thursday, November 21, 2019

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Program Materials

This CLE webinar will discuss equity cure rights provisions in commercial credit agreements. The panel will examine the complex interaction of equity cures with earnings before interest, tax, depreciation, and amortization (EBITDA) financial covenants, forms the equity cure may take when applied in the prepayment of the loan, and limitations that may apply on the right to cure.

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.

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Outline

  1. Relationship of equity cure rights to financial covenants--a mechanism for avoiding default
  2. Effect of equity contribution on EBITDA
  3. Equity cure right structures, restrictions, and limitations
    1. Type of equity
    2. Source of capital
    3. Use of proceeds
    4. Amount
    5. Frequency/timing
    6. Impact of prepayment
  4. Alternatives to equity cure

Benefits

The panel will review these and other notable issues:

  • What benefits do equity cure right provisions provide borrowers in sponsor-backed deals?
  • What restrictions do lenders seek to impose on the right to cure?
  • How should a preferred equity contribution be accounted for in calculating EBITDA at the time of application and thereafter?
  • When should a cash contribution from the sponsor be applied to pay down the principal balance of the loan? When not?

Faculty

Hespel, Paul
Paul W. Hespel

Partner
Alston & Bird

Mr. Hespel focuses on transactional finance matters, including leveraged acquisition financings and transactional...  |  Read More

Spader, Jay
Jay Spader

Shareholder
Brownstein Hyatt Farber Schreck

Mr. Spader has considerable work experience representing both borrowers and lenders in a wide variety of complex...  |  Read More

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