Credit Facility Review Guide
A credit facility is a loan documented over 100 pages of provisions that exist to make the lender comfortable. Every covenant restricts something the borrower might want to do. Eight provisions are responsible for 80% of the post-closing fights.
What it is
A credit facility is a loan or line of credit from one or more lenders to a borrower, governed by a comprehensive credit agreement. Common forms: term loans (one-time draw, scheduled repayment), revolving credit facilities (draw and repay multiple times), delayed draw term loans, and asset-based lines.
Syndicated facilities involve multiple lenders led by an Administrative Agent. The credit agreement governs both the borrower-lender relationship and the relationships among lenders. Pricing, covenants, and structure are negotiated up front; once signed, amendments are expensive and require lender approvals.
The economic life of the credit agreement is in the covenants, not the interest rate. The interest rate is a market price; the covenants are negotiable. Borrowers focus on rate; lenders focus on covenants. Wise borrowers learn to focus on both.
Common clauses to check
- [ 01 ]
Affirmative covenants
What the borrower must do — pay taxes, maintain insurance, deliver financial statements, comply with laws.
What to look for- Specific reporting requirements (audited annuals, monthly/quarterly financials).
- Notice obligations on material events (litigation, default, MAE).
- Financial reporting timelines (typically 90/45/30 days).
- Inspection rights for lender.
Red flags- Reporting requirements more burdensome than the borrower can meet.
- Notice obligations triggered by "any" change rather than material change.
- Inspection rights without notice or limit.
- [ 02 ]
Negative covenants
What the borrower can't do without lender consent — incur additional debt, grant liens, sell assets, pay dividends, change business.
What to look for- Permitted indebtedness baskets (with limits).
- Permitted liens (purchase money, capital leases).
- Restricted payments — dividends, share buybacks, distributions to equity.
- Acquisition limits (often subject to financial covenant compliance and "permitted acquisition" definition).
- Restrictive covenant baskets — "general" baskets for unforeseen needs.
Red flags- Tight baskets that prevent normal business operations.
- Dividend restrictions on holding company structures that block downstream cash flow.
- Cross-restrictions with other agreements (creating compliance traps).
- [ 03 ]
Financial covenants
Performance metrics the borrower must meet. The most common are leverage ratios and interest coverage.
What to look for- Maximum leverage ratio (Total Debt / EBITDA).
- Minimum interest coverage ratio (EBITDA / Interest Expense).
- Definition of EBITDA — including or excluding non-recurring items, stock comp, etc.
- Step-down schedule (covenants tighten over time).
- Equity cure rights — borrower can cure breach with new equity contribution.
Red flags- EBITDA defined narrowly without standard adjustments.
- No equity cure right.
- Aggressive step-downs that don't match business plan.
- Cross-default to financial covenants in other agreements.
- [ 04 ]
Events of Default
What gives the lenders the right to accelerate the loan, require immediate repayment of principal and interest, and exercise remedies.
What to look for- Failure to pay principal/interest with grace periods (3-5 business days for principal).
- Breach of covenants with cure periods (typically 30 days).
- Cross-default thresholds.
- Bankruptcy / insolvency events.
- Material misrepresentation.
- Change of control (also often a Mandatory Prepayment Event).
Red flags- No cure period for non-payment defaults.
- Cross-default thresholds set very low.
- Subjective triggers (e.g., "material adverse change").
- [ 05 ]
Material Adverse Change (MAC) clause
Specific Event of Default for material adverse changes. Heavily contested in litigation.
What to look for- Definition limited to "material adverse change" in business, financial condition, results of operations.
- Specific carve-outs (industry-wide, war/pandemic, regulatory).
- Disproportionate-impact qualifier.
- Time period over which MAC is measured.
Red flags- Broad MAC definition giving lender wide latitude.
- MAC tied to forward-looking projections.
- MAC carve-outs that swallow the rule.
- [ 06 ]
Mandatory prepayment
Cash sweeps and asset sales that reduce the loan balance, often with prepayment premiums.
What to look for- Excess cash flow sweep (50-75% of excess cash flow paid down).
- Asset sale proceeds prepayment requirements.
- Reinvestment rights — borrower can reinvest in business rather than prepay.
- Equity issuance prepayment requirements.
Red flags- Aggressive cash sweeps starving working capital.
- No reinvestment rights — every asset sale forces prepayment.
- Prepayment premiums on optional or mandatory prepayments.
- [ 07 ]
Security & guarantees
Collateral and guarantor obligations. Determines lender priority on default.
What to look for- Specific collateral (assets, receivables, inventory, IP).
- Subsidiaries that must guaranty (Material Subsidiaries definition).
- Foreign subsidiary CFC limitations on US-tax-driven structures.
- Excluded collateral (motor vehicles, real estate at limits).
Red flags- All-asset security with no carve-outs creates operational friction.
- Required guarantees from sister or parent entities outside the borrower's structure.
- Springing guarantees that activate on financial deterioration.
- [ 08 ]
Intercreditor & subordination
If multiple debt facilities exist, who has priority. Critical in leveraged structures.
What to look for- First lien / second lien / unsecured priority clearly stated.
- Standstill provisions limiting junior lenders' enforcement during default periods.
- Payment-in-kind (PIK) toggle for subordinated debt.
- Voting rights on amendments — split between senior and junior.
Red flags- Inadequate subordination provisions creating priority disputes.
- Unbounded standstill periods.
- Cross-acceleration requiring senior consent for junior remedies.
Other watchouts
- Pricing — interest rate, commitment fees, unused fees.
- Yield protection — gross-up for taxes, increased costs.
- Calculation Agent and Disqualified Lender provisions.
- Assignment and participation by lenders.
- Amendments and waivers — required lender thresholds (Required Lenders, Affected Lenders, All Lenders).
- Sanctions and ABC compliance.
- ERISA representations.
- Most-Favored Nation (MFN) on incremental debt.
- Commitment letter terms surviving the agreement.
- Letter of credit subfacility mechanics.
Frequently asked questions
- What's the difference between affirmative and negative covenants?
- Affirmative covenants are things you must DO (pay taxes, deliver financials, maintain insurance). Negative covenants are things you can't DO without consent (incur new debt, sell assets, pay dividends). Together they form the operational restrictions on the borrower during the life of the loan.
- What's a financial covenant?
- A specific performance metric the borrower must meet — most commonly maximum leverage (Debt/EBITDA) and minimum interest coverage (EBITDA/Interest). Tested quarterly. Breach triggers an Event of Default unless cured (sometimes via equity contribution).
- What is an equity cure right?
- A right granted to the borrower to remedy a financial covenant breach by contributing new equity capital — typically counted as additional EBITDA in the covenant calculation. Provides flexibility to address operational missteps without triggering default. Usually limited in frequency (e.g., not more than 5 times in life of loan, not in consecutive quarters).
- What's a syndicated loan?
- A loan where multiple lenders share the credit, led by an Administrative Agent. Allows borrowing larger amounts than any single lender would underwrite. Includes Required Lenders provisions for amendments, voting rights, and an Agent who deals with the borrower on day-to-day matters.
- What's a MAC clause in a credit agreement?
- Material Adverse Change clause — an Event of Default if the borrower's business suffers a material adverse change. Famously vague; heavily litigated; rarely successfully invoked because lenders prefer to amend rather than accelerate. The MAC is more often a negotiating lever than an enforcement tool.
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