février 26 2024

Liquidity covenants to the fore


At A Glance

In this article, Stuart Brinkworth explores what a liquidity covenant is and the issues facing sponsors and lenders in negotiating them.  With interest rates remaining at record levels and businesses still struggling with increased costs and the fall-out from the cost-of-living crisis, many businesses have been unable to meet leverage maintenance covenant requirements in their deals. As a quid-pro-quo for covenant relief, lenders often seek to impose a minimum liquidity covenant to ensure the business remains operationally solvent during the covenant relief period.

Key Points

  • Although the use of liquidity covenants in distressed situations is a tried and tested approach by lenders, there is no “one size fits all” when it comes to the implementation of a liquidity testing regime.
  • There are many touch points for negotiation including the timing of liquidity covenant testing, what is deemed to be a breach and whether there should be a cap on the number of cures.
  • Much will be driven by the extent of the distress and the level of support the sponsor will be willing to provide.

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