Michael Urschel and Ellen Snare
When companies look to borrow large sums of money—often to fund an acquisition, mission-critical investment or for a dividend recapitalization—lenders typically seek assurances that, in the event of a default, there will be sufficient, quality collateral in the capital structure. Affirmative and negative covenants restrict the sorts of activities or transactions a borrower and certain subsidiaries can undertake that might lead to collateral leakage or other circumstances that can affect the creditworthiness of a borrower. Negative covenants, in particular, are primarily meant to limit the outflow of assets from entities who are responsible for the debt, but also have day-to-day effects on running the borrower's operations and realizing business goals.
Because negative covenants are, by nature, restrictive, parties negotiating negative covenants should be sensitive to the sorts of operations that a borrower conducts, or may want to conduct, and what could set off red flags for a lender, or potential lenders in a syndicated transaction. In particular, understanding the negative covenant framework of a borrower across its capital structure can help business people and attorneys alike prepare to analyze potential strategic transactions for a borrower. This e-Learn will include an overview of negative covenants typically found in modern credit facilities and a number of scenarios illustrating their application, and some creative ways to accomplish a borrower's goals when faced with relatively restrictive covenants. It will also include discussion of the negotiation process and certain unusual exceptions or additions that have arisen in recent deals.
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