Covenants and Liability Management

1.A covenant tests total leverage each quarter, regardless of transactions. The limit is 4.5× and quarter-end leverage is 4.8×. Which conclusion follows under the stated test?

2.A $200 million revolver tests leverage only when more than 35% of commitments are drawn at quarter-end. For this test, usage is funded draws only. Draws are $70 million. Does the test spring into effect?

3.A note covenant permits ratio debt if pro forma net leverage is at most 4.0×. Before issuing debt, net debt is $360 million and covenant EBITDA is $100 million. The proposed $60 million is spent immediately. What does the ratio route show?

4.A covenant permits debt up to 4.5× leverage. Net debt for the test is $450 million. Reported EBITDA is $95 million, and the contract expressly allows $10 million of qualifying adjustments. What leverage should be tested?

5.A credit agreement allows a $50 million general debt basket and a separate $20 million equipment debt basket usable only for equipment purchases. The general basket has $35 million used. How much can be added for general corporate purposes under these two routes alone?

6.A lien basket is the greater of $40 million and 30% of covenant EBITDA. EBITDA is $180 million and $19 million is already used. What is remaining capacity?

7.A general debt basket has $30 million left. The only applicable permitted lien basket has $12 million left. How much new secured debt fits both baskets if each dollar uses one dollar of capacity in each?

8.An indenture allows $45 million of purchase-money liens solely on the equipment financed by that borrowing. A lender wants a lien on existing inventory for a new $20 million loan. What should the analyst conclude about this basket?

9.A negative pledge says that any new lien outside permitted exceptions requires equal and ratable security for existing notes. The proposed lien fits a stated exception. What follows from that clause alone?

10.A guarantee release clause allows release if a guarantor is sold in a permitted transaction and is no longer a subsidiary. The issuer sells a minority stake and retains control. What does this clause alone permit?

11.A covenant applies to the issuer and restricted subsidiaries. A proposal moves assets to an unrestricted subsidiary. Which provision should the analyst check first?

12.A permitted-investment basket starts at $60 million. The issuer used $42 million. An $8 million qualifying return replenishes the basket under its terms. What capacity remains?

13.A restricted payments basket adds 50% of positive cumulative net income, with no other additions in this example. Cumulative net income is $84 million and prior payments using the basket total $28 million. What remains?

14.An asset sale produces $90 million of net proceeds. Within the permitted period the issuer reinvests $25 million and repays $35 million of qualifying debt. An offer is required when unused proceeds exceed $20 million, and must cover all unused proceeds. What amount is offered?

15.An asset sale covenant permits reinvestment within 12 months. The issuer expects to sign a purchase agreement in month 11 and close in month 15. What must the analyst verify?

16.A change-of-control offer requires both a qualifying ownership change and a downgrade within 60 days. Ownership changes, but the rating is unchanged through day 60. What does the clause require?

17.A triggered change-of-control offer pays 101% of principal plus accrued interest. Holders tender $40 million face, and accrued interest on those notes is $600,000. What cash is required for those tenders?

18.A cross-acceleration provision applies when at least $25 million of other debt has actually been accelerated. Another lender has declared a covenant breach on $40 million but has not accelerated. Has this provision triggered?

19.A note provides 30 days of grace after missed interest before the missed payment becomes an event of default. Interest remains unpaid after 12 days. What does the note show?

20.A note says acceleration after a covenant event of default requires holders of at least 25% of outstanding principal to direct the trustee. There is $400 million outstanding and holders of $85 million direct acceleration. Do they meet the threshold?

21.A debt agreement allows ordinary amendments with more than 50% of eligible principal. Of $300 million outstanding, $40 million held by an affiliate is excluded. Eligible holders of $125 million consent. Does the vote pass?

22.A note permits a majority to waive reporting covenants, but reducing principal requires each affected holder's consent. A 70% vote approves both changes. What is the result under those terms?

23.A lender argues that the phrase senior unsecured gives it first access to collateral. What should the credit analyst check?

24.The loan agreement says covenant calculations exclude cash at non-guarantor subsidiaries. A borrower has $310 million of debt, $40 million of qualifying cash, and $30 million of excluded cash. What net debt enters the test?

25.A purchase agreement can close only if the credit facilities are repaid and their liens released. What evidence should a lender require when reviewing closing mechanics?

26.A single amount of debt may be allocated across two baskets under the agreement. One has $18 million available and the other $22 million. The full $35 million qualifies for both. Can it fit under these baskets?

27.A debt basket originally funded $30 million. The agreement expressly allows reclassification to a ratio basket if its current test is met. Reclassification would restore the original basket. What should be documented?

28.A credit agreement restricts subsidiary dividends. A basket allows $25 million of dividends only when no default exists. The issuer proposes $15 million while a default is continuing. Can it rely on this basket?

29.A debt covenant permits borrowing by the parent, while a separate guarantee restriction applies to a subsidiary asked to guarantee it. What needs checking?

30.A springing covenant tests the sum of funded draws and letters of credit once that sum exceeds $75 million. Draws are $68 million and eligible letters of credit are $10 million. What happens?

31.A covenant cure provision permits a $10 million equity contribution to count as EBITDA for the current maintenance test only. What should an analyst avoid in a forecast?

32.A lender has two documents with different definitions of net debt. What is the right way to assess a refinancing under both?

33.An intercreditor agreement says the first-lien agent controls collateral enforcement for 120 days before junior enforcement may begin, subject to other terms. What protection is affected?

34.A covenant requires quarterly financial statements within 45 days. Management has shared only unaudited headline revenue and profit by day 40. What should the analyst check before declaring a breach?

35.A permitted debt route requires both leverage of 4.5× or less and interest coverage of at least 2.0×. Pro forma leverage is 4.3× and coverage is 1.8×. What does the route permit?

36.A credit memo lists unused capacity but does not identify the document version, measurement date, or calculation of prior usage. What would make it reviewable?

37.A firm replaces $200 million of 5% notes due next year with $200 million of 8% notes due in five years. Ignore fees. What changes?

38.A firm must redeem $160 million face at 102 plus $1.2 million of accrued interest. New debt provides $160 million of cash after its own issuance fees. How much extra cash is needed at redemption?

39.A $250 million bond issue is priced at 98. The issuer pays a $3 million underwriting fee in cash. What are net cash proceeds before any other costs?

40.A borrower issues $300 million of notes at par. It spends $280 million repaying old principal, $6 million on a call premium, and $4 million on fees. How much cash remains from the transaction?

41.A refinancing basket caps replacement principal at the amount retired plus expressly permitted premiums and fees. The issuer retires $100 million, pays a $2 million premium, and incurs $1 million of eligible fees. What is the maximum face amount under this basket?

42.A replacement-debt provision requires maturity at least as late as the debt retired and prohibits adding collateral. The new note matures two years later but is secured. Can the issuer rely on this provision for the proposed terms?

43.An agreement permits refinancing debt with no shorter weighted average life. The old loan is a $100 million bullet due in year four. The replacement pays $50 million in year one and $50 million in year five. What does the test show?

44.A new term loan has a later final maturity but starts amortizing immediately. What should the analyst show in a liquidity comparison?

45.A borrower replaces fixed-rate debt with floating-rate debt at a lower initial rate. What should the refinancing memo quantify?

46.A new floating-rate loan applies a 2% floor to the benchmark and then adds a 4% margin. The benchmark is 1.25%. What is the coupon?

47.A borrower announces a refinancing mandate but the bank has only agreed to seek lenders, with no commitment to fund. What should the base and downside analysis distinguish?

48.A refinancing pays off debt that carries a restrictive maintenance covenant. The replacement has no maintenance test but retains debt incurrence limits. What changes for creditors?

49.A borrower uses a secured loan to repay near-term unsecured notes. Other unsecured notes stay outstanding. What two effects should their holders consider?

50.A note's indenture has a springing maturity if more than $30 million of specified older notes remain 90 days before their maturity. The older issue has $48 million outstanding. What minimum retirement prevents the trigger on that measurement date?

51.A borrower will close a new facility only after its existing lender delivers a payoff letter. The new facility's funding occurs at closing. What should a closing checklist resolve?

52.A bondholder tenders $75 million of old principal into an exchange paying 80 cents of new face for every dollar tendered. How much new face is issued to that holder?

53.An exchange offers $75 face of new notes per $100 old face. New notes trade at 92% of face and tendering holders receive $4 cash. What is consideration at market value per $100 old face?

54.A $500 million issue exchanges 70% of its face at 85 cents of new principal per dollar of old principal. Ignore other changes. What combined face remains across the old and new issues?

55.An exchange replaces $200 million face at a 6% cash coupon with $160 million face at a 9% cash coupon. What happens to annual cash interest, assuming a full year on either structure?

56.A firm offers to replace a 7% cash-pay coupon with 3% cash and 6% paid in kind at unchanged initial principal. What should a credit memo highlight?

57.A voluntary exchange requires 80% participation. The issuer receives tenders for 72% and has not waived the condition. What should the forecast assume at that point?

58.A tender offer accepts no more than $60 million face. Holders tender $100 million and the terms require simple pro rata allocation with no preferences. A holder tenders $15 million. How much is accepted?

59.An exchange pays a fee only to holders that tender by the early date. A holder tenders after that date but before the final cutoff. Which economics should the analyst use?

60.An exchange and a consent solicitation occur together. Ordinary covenants can be amended with majority approval, but maturity and principal require affected-holder consent under the terms. What must a holdout analyze?

61.An exchange offers higher priority to participants, while holders that decline retain the same nominal coupon. What should a holdout compare?

62.A transaction extends maturities and reduces face value but replaces unsecured notes with first-lien debt. Which presentation is most useful to remaining unsecured holders?

63.An issuer offers a longer maturity and lower coupon when it has no credible means of paying the old maturity. How should the credit analyst frame it?

64.A borrower can refinance at par with no maturity stress or accept a slightly discounted early tender funded by existing cash. What should determine whether the tender benefits creditors left behind?

65.A borrower pays $88 million cash to buy back $100 million face. Ignoring fees, by how much does net debt decrease if the cash was unrestricted and fully netted before the transaction?

66.A proposed debt exchange improves interest coverage only if at least 90% of eligible holders participate. What should the downside case retain?

67.A new bond funds retirement of old debt but can be called by the issuer at par much sooner. What additional valuation question matters to participating creditors?

68.An exchange announcement says creditors accepted a 20% haircut. Consideration includes a 10-point cash payment and new debt with 80 points of face. What should the analyst ask?

69.A planned refinancing replaces a $90 million term loan and terminates its $40 million undrawn revolving commitment. The new loan offers no revolver. What should the analyst flag?

70.A company plans a refinancing and separately announces a special dividend funded from the new proceeds. What should the credit analysis show?

71.A borrower has $100 million of old notes due in one year. An exchange takes $70 million into new five-year debt. A separate cash tender retires $10 million of the nonexchanged notes. What remains due on the old maturity date?

72.A credit committee asks which of two refinancings is safer for an existing unsecured bond. Plan A extends maturity with unsecured debt at a higher coupon. Plan B extends it with secured debt at a lower coupon. What should the recommendation compare?

73.A borrower raises $40 million secured against previously unpledged assets. In the downside scenario the cash has been spent, total distributable value stays $150 million, and $120 million of unsecured notes sit behind the new secured claim. What is unsecured recovery?

74.A shared collateral pool has $180 million of net realizable value. Existing first-lien debt is $150 million. New pari passu first-lien debt is $75 million. How much does the existing class receive if both share pro rata and have no other recovery source?

75.A new $50 million facility is contractually senior in the collateral waterfall to an existing $120 million first-lien loan. Net proceeds are $110 million, and the existing loan has no recovery elsewhere. What is the existing loan's recovery rate?

76.A new $70 million second lien sits behind a $100 million first lien on collateral worth $140 million net. Both claims have no other recovery. What does the second lien receive?

77.A borrower grants a new lender a lien on a factory while the old lender's first lien covers only inventory. What determines which lender is paid first from factory sale proceeds?

78.A borrower grants security to existing notes on an equal and ratable basis with a new loan. Both have claims of $90 million on the same pool, with $144 million of net collateral proceeds and no recovery elsewhere. What is each claim's recovery?

79.A new asset-backed revolver has first claim on inventory and receivables. An existing term lender has first claim on equipment and a second claim on the revolver collateral. What should the analyst build?

80.A borrower has $110 million of eligible inventory at a 55% advance rate and $80 million of eligible receivables at 80%. Reserves reduce the base by $9.5 million. With a $125 million commitment and $85 million drawn, what is additional availability if all draw conditions are met?

81.Inventory ages and drops out of a borrowing base, though the credit line's commitment stays fixed. What should the liquidity forecast do?

82.A borrower draws $25 million under an unused first-priority revolver before default. Of those proceeds, $10 million remains in the same distributable pool and the rest is spent. How does the amount left after paying the revolver change, assuming it is fully paid?

83.A new lender pledges to inject $50 million for a turnaround. How should an analyst test its recovery impact on existing creditors?

84.A secured refinance pledges assets for new debt but releases a prior lien on different assets. What comparison reveals the effect on an unsecured note?

85.A covenant restricts new liens, but the issuer has a permitted receivables facility with its own priority rules. What mistake should the credit memo avoid?

86.A subsidiary borrows $80 million secured on its assets and uses the proceeds to distribute cash to its parent, which spends it. Parent unsecured notes have no subsidiary guarantee. What is the principal downside effect?

87.A company designates a subsidiary holding a valuable brand as unrestricted and the old notes have no direct claim on its assets after designation. The subsidiary then raises secured debt. What should the recovery model test?

88.The credit agreement prohibits granting a lien on a named patent to new lenders. The issuer proposes a new lien on that patent and argues a general lien basket has unused dollars. What matters first?

89.A group has $75 million of unpledged asset value and $50 million of unsecured notes. It uses $40 million of that value as collateral for a new $40 million secured claim. Assume proceeds are spent and no other pool exists. What is recovery on the unsecured notes?

90.A $100 million secured claim has net collateral proceeds of $65 million. Its remaining claim shares pro rata with $70 million of other unsecured claims in a separate $42 million pool. What total recovery does the secured lender receive?

91.A first-lien loan recovers from a pool with $100 million of gross proceeds and $12 million of prior enforcement costs. Its claim is $110 million and there is no other recovery. What percentage does it receive?

92.A new loan includes mandatory amortization. If the borrower meets the schedule, how should its claim in a default two years later be modeled?

93.A portfolio owns both an old note eligible for an exchange and a separate note that is not eligible. What should the analysis report?

94.A new first-lien exchange note receives 65 cents of face per dollar of old notes and no cash. In a downside, it recovers 80% of its own face. The old note would recover 45 cents per dollar of old face after the exchange. What is the recovery comparison on the same old-face basis?

95.A noteholder can accept 8 cents cash plus 70 cents new face per old dollar. Under a downside, the new note pays 50% of face. The nonparticipant receives 48 cents on the old note. Ignore timing. Which pays more in that scenario?

96.A senior refinance reduces one-year default probability from 10% to 6%, but remaining unsecured recovery falls from 60% to 30% in a simplified model. What happens to expected loss for those unsecured notes?

97.A credit analyst estimates 60% recovery on a second lien before a new borrowing. What is needed to update that estimate if the new borrowing shares the first lien?

98.An intercreditor agreement requires junior lenders to turn over certain collateral proceeds to the senior agent. What should be reflected in the model?

99.New secured notes have priority on a specified pool but expressly waive any unsecured deficiency claim. What should the model do if collateral proceeds are below their face?

100.A refinancing leaves the same aggregate secured face amount but moves priority from equal sharing to a split between first- and second-priority tranches. What should an analyst compare?

101.A new facility requires a minimum collateral coverage ratio of 1.5×. Eligible collateral is $135 million and secured balances counted in the ratio would total $95 million after the new draw. Does it pass?

102.A proposed amendment can release collateral only with consent from two-thirds of each affected class. Class A approves with 80% and Class B with 60%. Aggregate approvals exceed two-thirds. Does it pass as written?

103.A lender's base case assumes a new lien can be granted, but a competing class disputes the consent calculation. What is the most useful treatment for recovery analysis?

104.A recapitalization adds a senior claim but also retires some debt at the same rank as an existing unsecured bond. Why should both changes enter the new waterfall?

105.A lender expects net collateral proceeds of $180 million in an orderly sale and $120 million in a forced sale. Prior secured claims total $90 million and the next secured class totals $75 million. What is the next class's recovery range, assuming no costs beyond the stated net values?

106.A credit committee asks whether the new secured loan is good for the old notes. Which answer is most complete?

107.A borrower replaces $50 million of old secured debt with $65 million of new debt that ranks ahead of $100 million unsecured. Net distributable value rises from $130 million to $140 million in your scenarios. What happens to unsecured recovery?

108.A refinancing memorandum says secured recovery is unchanged because existing claims still have the same face and lien label. The new collateral schedule excludes a material warehouse. What should the analyst challenge?