Module IV· Debt RatiosBasic
Question
What is the difference between 'maintenance' and 'incurrence' covenants?
Answer
| Aspect | Maintenance | Incurrence |
|---|---|---|
| Test | quarterly (ongoing) | only on events |
| Example | 'Senior/EBITDA < 5x always' | 'no new debt if >5x' |
| Severity | breach = default | action prohibition only |
| Typical for | TLA, RCF, bank loans | TLB (Cov-Lite), HY bonds |
| Sponsor wants | fewer | more (Cov-Lite) |
Modeling implication
Maintenance needs a 25%+ headroom cushion every quarter. Incurrence is only relevant for strategic actions.
Pitch tip
Sponsor standard: 'Cov-Lite TLB + 1 maintenance on the RCF'. Lender preference: 2-3 maintenance covenants. A standard negotiation point.