Credit covenants glossary

This is an edited version of ‘The Official Covenant Review Plain English Leveraged Loan Glossary’. You can access the full glossary here for more detailed descriptions and additional terms. You may need a CreditSights account to access the document.

You can also view the GICP’s Credit Glossary here.

A
Acceleration	The declaration that debt is immediately due and payable (typically in the context of it being prior to the scheduled maturity date—i.e., the maturity date has been accelerated to the current moment).
Acquired debt	Debt that is obtained in connection with an acquisition (but was not incurred as part of, in contemplation of, or as a means of financing the acquisition).
Acquisition debt	Debt incurred for the express purpose of financing that acquisition.
Addback	The amount that is “added back” to EBITDA (usually after having been deducted from CNI). Addbacks are ostensibly designed to make EBITDA a more “accurate” metric of revenue coming into the business.
Affiliate transactions covenant	A covenant that governs the restricted group’s ability to enter into transactions with related entities (affiliates).
Affirmative covenants	A section in credit agreements that tells the borrower (and the restricted group) what they must affirmatively do to comply with the agreement.
Agreement among lenders (AAL)	A legal agreement by which the unitranche lenders agree to be allocated into different classes with different relative priorities.
Agreed security principles	A set of rules governing the types of collateral and other credit support (typically from non-US sources), which is usually attached as a separate schedule or exhibit to a credit agreement—particularly in cross-border transactions.
Anti-cash hoarding	These covenants or provisions are designed to prevent a company from holding onto too much cash particularly in times of volatility and usually in the context of revolvers.
Anti-layering covenant	A covenant or provision that prohibits the incurrence of 1.5 Lien debt (or other debt that sits below one class of debt and above another class of debt either in right of payment or in right of collateral).
Asset sale	Any disposition or transfer of assets, including licenses, leases, sale-leasebacks, and of true sales to third parties.
Asset sale covenant (disposition/ disposals covenant)	This covenant governs the restricted group’s ability to transfer assets (by sale or otherwise).
B
Basket	Any negative covenant exception. Broadly used to refer to any exception to the “general rule” of a negative covenant.
Bondification	The gradual transformation of loan documentation such that they increasingly resemble bond indentures (particularly in the context of covenants).
Builder basket	A type of carveout in negative covenants (usually limited to restricted payments covenants, investments covenants, and junior debt prepayments covenants). The basket typically includes a “starter” amount (capped at a fixed amount with a grower) and builds over time based on a particular growth metric.
C
Call protection	A concept which generally provides that if a loan is repaid early (“called”), then the borrower must pay a penalty or premium to affected lenders.
Cap table	Short for capitalization table and is the page in a lender presentation or bank book showing (1) “sources and uses” (i.e., how a particular transaction is going to be financed and how those financing sources will be utilized), and (2) a table showing the company’s debt and equity capitalization pro forma for the transaction.
Capex covenant	A covenant that limits the amount of capital expenditures a company can do in a given time period.
Capital lease obligation	A type of lease (usually on a fixed asset) that is treated as debt on a company’s balance sheet (in contrast to an “operating lease”).
Carveout	Slang for an exception to the general prohibitions contained in negative covenants. A synonym for basket.
Change of control	This is an event of default triggered by a sale of the borrower, or acquisition of a significant interest in the borrower, often measured by the percentage of voting stock held by particular entities (voting stock meaning any equity with the right to vote on members of the board of directors).
Chewy blocker	This is any term or provision designed to close the chewy phantom guarantee loophole. In most leveraged loan transactions, such a provision will impose additional hurdles that a borrower must jump before allowing the release of a non-wholly owned subsidiary from its guarantor role.
Chewy phantom guarantee	A guarantee by a wholly-owned restricted subsidiary of a borrower that can magically (and alarmingly) vanish, simply because the subsidiary ceases to be wholly-owned.
Collateral/ transaction security	Assets that secure debt.
Commitment fee	Typically applies to a revolver (though sometimes also to delayed draw term loans) and is a per annum fee on the unused or available (to be borrowed) portion of the revolver (or undrawn term loan).
Covenant	Requirements that tell the borrower or issuer (1) what to do (affirmative covenants), (2) what not to do (negative covenants), and (3) in some cases, what financial metrics to maintain (financial covenants).
Covenant-lite (cov-lite)	Generally refers to term loans that lack a maintenance financial covenant.
Covenant strip	An amendment to loan documentation that removes most (if not all) covenants (as well as other provisions, like mandatory prepayments and events of default).
Credit/ facilities agreement/ senior facilities agreement	The general term for the main legal agreement documenting term loan, ABL, and/or revolver debt and is the usual document that contains the covenants.
Credit facilities basket	This basket of the debt covenant allows for debt under “Credit Facilities.” The term includes any loans or bonds, and, therefore, can be extremely broad to the point of functioning as a de facto general basket.
Cross default	A standard event of default in leveraged loans, which is triggered if a member of the restricted group defaults under other material debt either because it failed to make a payment or because of some event that gives the holders of that other debt the option to accelerate (but not necessarily where the debt is actually accelerated).
D
Debt covenant	The negative covenant that limits the amount of indebtedness that can be incurred by the restricted group.
Default interest	Additional interest that is payable following a default or event of default in a credit agreement.
Designated commitments	This is a concept in some loan documentation where unfunded commitments are deemed outstanding as soon as they are established (typically: revolver or delayed draw term loan commitments). This allows the company to establish compliance with the debt covenant and liens covenant on the date the commitments are obtained, even if subsequent drawdowns on such commitments would technically be prohibited by such covenants.
Disqualified stock	Equity that has certain debt-like features (e.g., a maturity date or mandatory redemption requirement or prescribed regular “interest”-like payments) or which is convertible to debt.
E
EBITDA (Earnings Before Interest, (income) Tax, Depreciation and Amortization)	The income stream that lenders can count on or expect their borrower to generate, with which to service the lenders’ loans. Both leverage and coverage financial covenants build on EBITDA—greater EBITDA permits higher leverage and supports higher interest and other fixed charges as well.
EBITDAX (EBITDA plus eXploration)	This metric is commonly found in credit agreements for oil and gas deals.
Envision blocker	Any provision that potentially prohibits or inhibits a transaction like Envision’s “Amsurg”-related liability management transaction. However, there is no single type of Envision blocker, since the Amsurg transaction utilized several loopholes.
Equity credit	A basket that derives capacity from new equity proceeds received by the company.
Equity cure	A means by which a borrower that has breached a financial covenant can, in effect, cure the default. Equity cures permits equity-holders to contribute an amount to the borrower that, when added to EBITDA, puts the borrower in compliance with the required financial covenant.
Escrow	“Escrow” represents a kind of legal suspended animation. Here, the loans are funded into escrow—under the control of a third party that will not release the funds until those certain conditions acceptable to both the lenders and the borrower have been met.
Event of default	Any violation (i.e., a default) of loan documentation which allows the lenders to accelerate the debt under the credit agreement.
Excess cash flow	Excess cash flow is intended to quantify the borrower’s consolidated net income at fiscal year-end that is available to it after making various other required cash payments (e.g., for debt service, taxes, and other business expenses / activities).
Excess cash flow sweep	This is the mandatory prepayment provision requiring that the borrower make an annual payment to the lenders to prepay term loans out of the borrower’s excess cash flow.
Excluded contributions	Refers to equity proceeds or capital contributions that are specially designated by the borrower so as to be utilized as a carveout under such covenants.
F
Fair market value (FMV)	This refers to the metric used throughout the credit agreement, often in the context of determining basket usage. Although not always formally defined, FMV usually is meant to capture the value of an asset by reference to a hypothetical price agreed between a willing buyer and a willing seller.
Financial (maintenance) covenant	This is a covenant measuring or testing a borrower’s financial health; typically via certain metrics, such as a leverage ratio.
Fraudulent transfer	A claim made in bankruptcy against the bankrupt entity (the debtor) asserting that the debtor removed property or other value within a window prior to the start of the bankruptcy proceeding in an effort to defraud creditors.
Fundamental change covenant/ mergers covenant	A common negative covenant in credit agreements which is meant to prevent major changes in a particular borrower. It typically restricts mergers, acquisitions, as well as any sale of all or substantially all assets.
Fungibility	Refers to the identical treatment of two classes of debt. More specifically, fungibility refers to two related but distinct concepts: whether two tranches of debt are treated identically with respect to treatment under tax regulations (“tax fungibility”) and whether two tranches of debt are treated as essentially a single Tranche under the Credit Agreement (with the same economics, other than OID or upfront fees, and otherwise identical treatment under the covenants).
G
General asset sales basket	This usually refers to a particular carveout of the asset sales covenant. Specifically, in the context of the BSL market, the general asset sales basket refers to the ability to dispose of any assets or property outside of the ordinary course of business, usually on an uncapped basis and as long as other considerations are met
General basket	Any basket capped by a fixed amount with few (if any) other limiting conditions.
Going concern	A “going concern” qualification, is a statement from the borrower’s outside auditors that the borrower’s ability to continue as a going concern is not certain for the foreseeable future. It is a warning that the borrower is in severe financial distress or may be subject to a significant event in the near future and, therefore, is a very big deal.
Guarantee (guaranty)	An undertaking by a person or entity to be liable for the obligations of another person or entity if that other person or entity is unable to perform the obligations.
H
Hedging	An arrangement by which a borrower with a floating interest rate (as virtually every credit agreement provides) “swaps” that rate for a fixed interest rate obligation pursuant to arrangements with a third-party financial institution.
Holdco covenant	A negative covenant that typically only applies to holdings or other holding entities (holdcos). The covenant broadly prohibits holdcos from engaging in any material business outside of ownership of operating entities, although there is sometimes an exception allowing the holdco to lend money to the Loan Parties under specific circumstances.
Holdings	The direct parent of a borrower in a credit agreement. Holdings is often a loan party (and therefore provides a guarantee and pledges collateral, though sometimes limited to just an equity pledge) but may not be subject to the covenants (except for a holdco covenant). Holdings entities are usually not operating companies and therefore are unlikely to have any meaningful assets or revenues of their own.
I
Implied covenant of good faith and fair dealing	This is a concept in New York common law that every contract includes an implicit agreement between parties to perform its obligations under the contract in good faith. In short, that the parties won’t do anything to actively injure each other or deny the other party the right to “receive the fruits of the contract.”
Incurrence based	Refers to baskets or covenants where a financial ratio is tested upon incurrence.
Indebtedness	A defined term under most credit agreements that sets the parameters for what does and does not constitute debt for purposes of the credit agreement and the negative covenants.
Interest coverage ratio	Interest coverage ratio is a ratio of EBITDA to interest expenses (sometimes limited only to those interest expenses that are payable in cash).
Interest rate hedging covenant	This is an affirmative covenant for floating rate debt instruments that obligates a borrower to hedge a portion of its floating rate debt.
Investments covenant	This is a negative covenant that limits the restricted group’s ability to make investments.
J
J Crew trapdoor	The “trapdoor” in these cases permits the borrower to transfer assets from loan parties to an unrestricted subsidiary, in a two-step transaction in which the assets flow through a non-guarantor restricted subsidiary into an Unrestricted Subsidiary.
Junior (vs second) lien	This reflects priority in collateral. Lenders generally seek a first priority lien position in collateral (commonly shorted to just “first lien”), which they typically obtain by perfecting their lien first. This is nominally governed by a “first in time” rule (i.e., if two creditors seek a lien on a single asset, then the creditor who perfects first benefits from the more senior lien). But lenders can also get a first lien, or a “priming” lien, by contract, usually through an intercreditor agreement. Assuming a senior lien is a first priority lien, junior liens can be second priority, third priority, and so on down. The benefit of having a senior lien is nominally that in a foreclosure, senior lien holders are paid from collateral proceeds in full before junior lien holders get a dime. In reality, it means that in the event of a bankruptcy filing, the senior lien holders will be treated as the “first in line” lenders by the bankruptcy court (at least as it pertains to assets that are part of the collateral). Lien priority is not the same as payment priority.
Junior debt prepayments covenant	This negative covenant governs the restricted group’s ability to prepay debt that is junior in the capital stack.
L
Leverage ratio	A general term that refers to the ratio of debt to EBITDA.
Leveraged buyout (LBO)	An M&A transaction where the buyer finances the purchase of a company at least partially by incurring debt at the target (and, if financed with secured debt, secured by the assets of the target).
LIBOR (London Interbank Offered Rate)	Generally refers to the rate(s) quoted on a Reuters screen within certain parameters. LIBOR served for several decades as the index for interest rates in large credit facilities, regardless of whether there is any nexus to London and wherever a loan is funded. LIBOR (at least for USD-denominated loans) ceased publication on June 30, 2023 and has been replaced by SOFR in the BSL (and most other debt) markets in the United States. Among sterling- denominated loans, LIBOR has been replaced by SONIA.
Lien subordination	The subordination in right of collateral. The relative ranking in lien subordination is only in respect of shared collateral assets. Thus, for lien subordinated debt, collateral proceeds will be applied first to repay senior lien debt and then, only after the senior lien debt is repaid, to the junior lien holders.
Liens covenant	A negative covenant that limits the restricted group’s ability to incur liens. This covenant dictates how much secured debt a company can incur (and as such is a critical element in assessing covenant strength as a whole).
Limited conditionality transaction (LCT)	This allows the testing of whether a particular transaction is permitted under the covenants on a date other than when the transaction is consummated (for example, on the date on which the definitive documentation for such transaction was entered into).
Liquidity covenant	A financial covenant that typically requires a borrower to maintain a minimum amount of “liquidity” (typically defined as cash on hand that isn’t otherwise restricted, plus available short-term debt such as Revolver availability).
M
Mandatory prepayments (Sweep)	Provisions governing when debt is required to be prepaid (rather than prepaid voluntarily).
Margin/ applicable margin	The amount, expressed as an additional percentage or in basis points, added to the index rate (e.g., SOFR or an ABR) to determine the pricing on a facility.
MFN	The right of existing lenders under one or more facilities to “piggyback” on the higher pricing that incremental lenders (under an accordion) may negotiate with the borrower.
Middle market	Covenant Review applies the term to borrowers with up to $75mm of EBITDA. “Lower Middle Market” means under $25mm, “Traditional Middle Market” means between $25mm and $50mm, and “Upper Middle Market” means between $50mm and $75mm.
N
Negative pledge	A variation on the liens covenant that is more commonly associated with bond indentures than credit agreements. Where the “true” liens covenant prohibits the incurrence of liens, a negative pledge generally provides that if a lien is incurred in favor of a third party, then a similar lien must be incurred in favor of the bond holders.
No MNPI rep	A condition applied in the context of borrower or affiliate buybacks of debt in a credit agreement. In short, for the buyback to occur, the borrower and/or the purchasing affiliate must represent (that is, formally state) that it does not hold any “material non-public information” that would impact the assigning lenders decision to sell the term loan.
P
Pari plus	This is where the non-loan party subsidiary issuer also secures its debt with assets that do not secure the parent debt (e.g., assets that are transferred to the subsidiary issuer from the parent via a drop down or assets that were not part of the collateral at the parent debt from the beginning).
Parting kiss	A term used to describe amendments made to loan documentation, where the consenting lenders are expected to immediately (if not simultaneously) exit the credit agreement.
Payment in kind (PIK)	A form of interest, which, instead of being paid in cash, is added (or “capitalized”) to the amount of principal that remains outstanding.
Payment/contractual subordination	This refers to subordination in right of payment. This usually means that debt that is subordinated will not be repaid until the entirety of senior debt has been fully repaid (regardless of whether the proceeds are from collateral or not).
Payments for consent covenant	A provision in some debt documents that generally prohibits the obligor from providing an incentive to only some creditors to solicit their consent for an amendment or other change (any such incentive or consent fee must instead be offered to all creditors of the applicable tranche of debt).
Permitted acquisition	An acquisition of business units, subsidiaries, or other major entities. Typically, permitted acquisitions will also be subject to a slate of negotiated terms and parameters if the acquisition is of an entity that ends up not providing credit support for the credit facilities.
Permitted holder	These generally refer to those persons or entities who either (1) are required to hold some minimal percentage of the company (lest a change of control event occur) or (2) are allowed to acquire a significant portion of the company (without triggering a change of control event).
Permitted refinancing	A concept in many debt agreements which allows existing permitted debt to be refinanced or exchanged into other classes of debt mostly on a “like for like” basis.
Pick your poison	Shorthand referring to a family of baskets that permit a borrower to incur debt in the amount of available capacity under specified baskets in one or more other (non-debt) covenants which in turn would reduce capacity under such baskets for other purposes. In some cases, there is a corresponding liens covenant carveout permitting “pick your poison” debt to be secured.
Private credit	Covenant Review’s private credit offering covers loans that are not in the BSL, which includes direct lending, unitranche, club deals, and/or private syndication (though largely exclusive of debt traditionally provided by banks, e.g., standalone revolvers and term loans A).
Pro forma	A way of saying “giving effect to.” Many calculations are required on a pro forma basis, meaning that events or transactions are given effect to, as though they had occurred, so the parties can fairly measure their impact.
Purchase money	A way of describing debt (and liens securing that debt) that is incurred for the express purpose of acquiring specific assets (with any lien securing that debt limited to the acquired assets). Lenders tend to impose fewer restrictions on such debt because they regard the underlying transaction as essentially a wash; the borrower’s balance sheet expands on both sides of the ledger by a roughly equal amount.
R
Reclassification	This can permit the borrower to empty the fixed cap baskets within a given negative covenant (or the accordion) using any of the incurrence-based carveouts whenever the applicable ratio can be satisfied.
Reinvestment right	This broadly provides that a borrower may take net cash proceeds otherwise earmarked for the prepayment of term loans and instead reinvest such proceeds back into the company.
Restricted group	A shorthand term for the borrower and any restricted subsidiaries, that is, the parties generally subject to the affirmative and negative covenants.
Restricted payment	Restricted payments usually refer to dividends or distributions to equity-holders, stock buybacks, and, occasionally, certain other payments to a sponsor. For HY bonds, however, the term can also encompass investments and prepayments of junior debt.
Restricted payment covenant	A negative covenant that limits the restricted group’s ability to make restricted payments. In bonds, the restricted payments covenant usually encompasses the junior debt prepayments covenant and investments covenant (as one SUPER covenant), though in loans, these three covenants are usually separated. Thus, for loans, the restricted payments covenant is also sometimes referred to as a dividends covenant.
S
Sale leaseback	A type of financing transaction where company A sells an asset to company B, before immediately leasing the asset back for its own use.
Securitization financing	A financial instrument where a pool of cash-generating assets is bundled together and then sold as interest-bearing securities.
Security/ collateral agent	The institution that has responsibility over the creation and perfection of liens on collateral. Usually a bank, the collateral agent holds possessory collateral (e.g., stock certificates) and is the named secured party on relevant collateral documentation.
Spin off	A transaction where equity of a subsidiary is transferred to a parent entity (or other equity- holders).
Springing covenant	A type of financial covenant that is only tested if certain conditions are met (usually on a specific date).
Springing maturity	A mechanism that allows a scheduled maturity date to advance forward to an earlier date.
Standstill provision	A feature in intercreditor agreements whereby the junior lien holders agree not to pursue remedies (e.g., by foreclosing on Collateral) until after a set period of time has elapsed after the declaration of an event of default. The purpose of a standstill period is to ensure that senior lien holders have the “first crack” at exercising remedies.
Syndication	The marketing and selling of debt to institutional investors.
T
Tangible	Assets that would not be classified as intangible under GAAP, such as goodwill and certain intellectual property.
U
Unrestricted subsidiary	In essence, the opposite of a restricted subsidiary. Where restricted subsidiaries’ metrics are included in calculating financial metrics, unrestricted subsidiaries are not. Where restricted subsidiaries are beholden to the covenants, unrestricted subsidiaries are not. Typically, any restricted subsidiary can be designated as unrestricted so long as the borrower jumps through certain hoops (including, most notably, requiring that sufficient investments capacity exists).
W
Waterfall	Any provision that governs the application of proceeds provision (e.g., following the enumerated events of default or with respect to cash withdrawn from a specific account). When used generically, it typically refers to the application of proceeds after the enforcement against collateral.