The Equity Cure Provision Study
In order to demonstrate how Kira’s credit agreement provisions could be used to conduct a deal points study, we tested our software on the prevalence of and variation in equity cure provisions in U.S. credit agreements publicly filed in Q3 and Q4 of 2017. The findings of this study were first presented to the Commercial Finance Committee of the American Bar Association Business Law Section in Orlando, Florida, on April 13, 2018.
About the Study
Kira identified a set of 117 credit agreements from EDGAR using the following parameters: syndicated and secured credit agreements, with lender commitments of between $25M and $500M, dated between July 1 and December 31, 2017. We imported these agreements into Kira and reviewed the results.
We then used Kira’s “Equity Cure Right” and “Financial Covenants - Credit Agreements” built-in provision models to automatically find those provisions in the credit agreements.
The following list outlines our high-level findings on variations witnessed between equity cure provisions. For a full version of the report including methodology, charts, and more detailed analysis, please download the complete study here.
The Results
1. Prevalence of Equity Cure Provisions
Of the 117 secured syndicated credit agreements in the sample set, 97 credits agreements contained financial covenants, 95 of which contained at least one financial covenant which was capable of being cured by an equity cure provision. Despite this, only 21 of the credit agreements contained equity cure provisions, whereby a borrower can receive financial support from the sponsor to improve financial metrics in order to cure a default under the financial covenants.
2. Type of Financial Covenant
A majority of the equity cure provisions were applicable to breaches of the typical EBITDA financial covenants: leverage ratios, fixed charge coverage ratios, and interest coverage ratios. There were few outliers that sought to cure breaches of other types of financial covenants (such as a debt service coverage ratio).
3. Cure Method
A vast majority of the equity cure provisions used the equity contributions to increase EBITDA in order to cure financial covenant breaches (73%). There were only a few deviations that cured financial covenant breaches through loan reduction or an injection of cash flow.
4. Proceeds Treatment
Nearly half of the equity cure provisions required that the proceeds of the equity contributions be subsequently applied as a prepayment to the principal outstanding (48%), while many were also silent on how the proceeds were to be allocated (43%).
5. Frequency Limits
Most equity cure provisions contained a limit on the number of cures that could occur throughout the term of the loan and/or in any fiscal year (76%). Most frequently, the provisions established a limit of five cures during the term of the loan and a limit of two cures per fiscal year, none of which could be applied to consecutive fiscal quarters.
6. Standstill
Nearly all equity cure provisions contained a standstill period or “cure period” during which lenders cannot seek remedy or acceleration of the loan after breach of the relevant financial covenants (90%).
Conclusions
In addition to quickly assembling aggregate statistics on the prevalence of equity cure provisions, Kira automatically created an easily searchable archive of precedent language. A review of the results in our sample set revealed that although the equity cure provisions were largely similar in effect, there were nonetheless variations within them, including those noted above.