Trials and Tribulations of Calculating Covenant Capacity — Part 1 — Shrinking Numerators
- Alice Holian
As market conditions remain challenging (and scary!), we’ve taken the opportunity to dive headfirst into the trials and tribulations of calculating covenant capacity — certainly not a topic for the faint-hearted. Calculation mechanics and financial definitions are becoming more complex and bespoke. Covenant figures continually move further and further from their accounting or reported counterparts, making it difficult to calculate covenant capacities with any modicum of accuracy. Prior periods of low interest rates and flowing liquidity created ripe conditions for innovations to take root in the market as investors piled into deals and very little pushback was achieved (or perhaps even raised). We doubt that recent market volatility and rising interest rates will be enough to turn the tide on covenant innovations.