The proceeds of a revolving credit facility can typically be applied for general corporate purposes, whereas the permitted use of proceeds for delayed draw facilities and capex lines may be for more limited purposes. Companies should be mindful of the permitted use of the proceeds of any drawdown. ![]() Existing credit facilities can be drawn by a company simply completing and delivering a borrowing request to the facility agent and, depending on the currency of the borrowing, the proceeds of the loan will be made available to the company within a few days (or an even shorter period of time) thereafter. In determining a company’s capacity to incur indebtedness, the debt covenant in the credit documentation will provide a laundry list of permitted indebtedness or “baskets.” The following is a list of the most common debt baskets available to companies, including commentary around the ease with which each debt basket can be utilised and the implications for the company’s capital structure:Įxisting Credit Facilities: the easiest and most obvious way to access cash is to drawdown on existing committed credit facilities, including, for example, revolving credit facilities, delayed draw facilities and capex lines. If the Proposed Funding Is Indebtedness, Does the Company Have Capacity to Incur Such Indebtedness? Importantly, items that are excluded from the definition of indebtedness under the incurrence covenants are typically excluded from the calculations of leverage, which may also impact the ability to incur other indebtedness under the incurrence covenants, as discussed below. Some of the typical exclusions from the definition are, in fact, financial obligations, such as loans from shareholders that are structured to be equity-like from the perspective of the bondholders or term loan lenders ( e.g., maturity outside the maturity of the bond or loan, no security, subordinated to the bond or loan) and certain types of receivables financing. It is not unusual for there to be a lengthy list of exclusions from the definition of indebtedness and, therefore, there is a possibility that a company’s ability to incur such excluded indebtedness may not be limited by the debt covenant at all. The gating question that must always be asked is whether the new funding constitutes “indebtedness” for the purposes of the incurrence covenants. Is the Proposed Funding ‘Indebtedness’ for the Purposes of the Incurrence Covenants? Creditors providing such liquidity facilities may require a priority position with respect to liabilities owed to existing creditors, particularly in relation to distressed companies and this article explores some of the creative ways such priority could be achieved in the critical search for liquidity. This article provides a summary of the issues companies and creditors should consider when determining the possible forms of funding available under existing bond and/or term loan covenant packages. This has led to a liquidity crunch and an urgent need for businesses to understand the options available to them to access liquidity within the framework of their existing capital structures to facilitate their survival during this period of suspended or reduced trading. Many businesses, such as those in the travel and hospitality industries and businesses providing “non-essential” goods and services, have been mandated by a number of governments around the world to close their doors until further notice. The combination of these two factors coupled with the uncertainty surrounding the length of time COVID-19 will hold a significant portion of the world’s population captive has brought the primary debt markets to a grinding halt. ![]() ![]() The global economy has been greatly impacted by the COVID-19 pandemic and a significant drop in oil prices.
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