Financial Covenants: Maintenance vs Incurrence
Chapters in this video
- 0:00 Maintenance versus incurrence covenants: the smoke detector and the bouncer
- 2:52 EBITDA definitions and the ceiling versus floor ratio traps
- 4:15 The five negative covenants and trapped asset-sale proceeds
- 5:54 Short-term liquidity and the maturity-wall restructuring trigger
- 7:20 Rapid-fire exam recap
What this video covers
- Why maintenance covenants trip automatically every fiscal quarter like a smoke detector, while incurrence covenants act like a bouncer blocking only specific restricted actions
- Which document types carry which covenant style: bank credit agreements and revolvers for maintenance, high-yield indentures and covenant-lite loans for incurrence
- How earnings before interest, taxes, depreciation, and amortization (EBITDA) definitions drive covenant headroom, and why distressed workouts often renegotiate the add-backs
- Which ratios are capped at a ceiling (leverage, senior leverage) versus floored at a minimum (interest coverage, fixed-charge coverage, minimum liquidity), and the direction of failure for each
- The five negative covenants: debt incurrence, lien incurrence, restricted payments, asset sales, and affiliate transactions, plus why asset-sale proceeds are trapped for reinvestment or debt repayment
- Why change of control is typically a put right at 101% of par, not an automatic event of default
- How short-term liquidity is assessed on a strict 12-month window, yet an unrefinancable maturity wall can still force restructuring today
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