Module IV· Debt RatiosAdvanced
Question
What is a 'springing covenant' in an RCF?
Answer
What
A springing covenant is a maintenance covenant that activates only under certain conditions — typically when the RCF is drawn. With an undrawn RCF it does not apply (Cov-Lite-like); with an active RCF it is tested quarterly.
Example clause
"The senior leverage ratio below 5.5x is tested when the RCF is drawn AND the drawn amount exceeds 30% of the RCF commitment."
This gives the sponsor an incentive to use the RCF only short-term — working capital or a bolt-on bridge, not as long-term financing.
Deep diveShow more details
Standard vs springing
| Aspect | Standard maintenance | Springing |
|---|---|---|
| Test frequency | always quarterly | only on the trigger condition |
| Sponsor-friendly | less | more |
| Lender protection | high | only in the risk scenario |
| Common for | TLA, classic | TLB, Cov-Lite style |
Example scenario (30% trigger)
| Quarter | RCF drawn | Test active? |
|---|---|---|
| Q1 | 0 | no |
| Q2 | 0 | no |
| Q3 | $5m (10% of commitment) | no |
| Q4 | $18m (36%) | yes — leverage below 5.5x required |
Common pitfalls
- Springing covenants apply only to the RCF tranche, not to the TLA/TLB.
- In distress sponsors deliberately avoid an RCF drawdown to sidestep the test: but then liquidity is missing when it is needed.
Pitch tip
Question: "Why does a lender accept a springing covenant?"
Answer: "It protects the lender when the line is actually used. With an undrawn RCF there is less risk — the sponsor benefits from a compliance-free period, and the lender only tests on activation"