Financial Covenants in Asset-Based Lending

Summary

This practice note discusses financial covenants in asset-based credit facilities. While cash flow of a business is important in an asset-based facility, particularly as it relates to the real time liquidity of the borrower based on excess availability, there is significantly less emphasis on financial covenants in an asset-based facility than in a cash flow loan facility. This is one reason many companies elect to have an asset-based facility rather than other forms of debt. Some companies, depending on market conditions, may be able to obtain a cash flow facility or issue high-yield notes using a "covenant-lite" structure, where compliance with the financial covenants is only required as a condition to certain permitted transactions (incurrence covenants), rather than on-going compliance with the financial covenants (maintenance covenants). However, asset-based lending offers similar flexibility to a wider range of companies and is available regardless of the conditions in the ...