Covenant reset mechanisms should be considered in transactions with re-gearing flexibility supporting a buy-and-build strategy

Date 1 May 2024

Type Investment Banking

Given the current higher cost of financing, there is more caution around deals being over-levered day one and a greater focus on cash cover being at an acceptable level. The resulting impact is that opening leverage levels are lower than 2021 and 2022 comparables, especially for less competitive sectors.

Nonetheless, buy-and-build strategies remain prevalent and borrowers are focused on partnering with a debt provider that allows the flexibility to execute this strategy using further leverage. Increasingly funds are permitting the ability to re-leverage above opening levels to fully or partially fund acquisitions using incremental facilities.

It is not uncommon that borrowers are reporting reducing / tightening covenant headroom resulting from this re-leveraging as appropriate covenant reset mechanisms have not been drafted into the Senior Facilities Agreement.

Alantra has a number of covenant reset precedents following a re-leveraging event that should be considered ahead of agreeing commercial terms and would be pleased to discuss these with you.