A liquidity covenant is a financial stipulation included in loan agreements requiring the borrower to maintain a specified minimum level of liquid assets or cash flow to ensure they can meet their short-term obligations. Non-compliance with this covenant can lead to penalties, increased interest rates, or even the loan being called in by the lender.
Notwithstanding anything to the contrary contained in the Guarantee, Guarantor and Buyer agree that, if (a) Guarantor has entered into amendments of its liquidity covenants with each of the other repurchase buyers under all repurchase facilities that currently (or as of the Liquidity Covenant Modification Effective Date (as defined below)) have liquidity covenants more favorable to such repurchase buyers than the Requested Liquidity Covenant (as defined below) (such repurchase facilities, the “Other Facilities”) to which Guarantor is a party on or before September __, 2020, and (b) in all of such amendments to the Other Facilities, Guarantor’s liquidity covenant has been modified to be less restrictive to Guarantor than the liquidity covenant expressly set forth in Section 9(a) of the Guarantee, then Guarantor will give Buyer prompt notice thereof and, upon the earlier of (such earlier date, the “Liquidity Covenant Modification Effective Date”) (i) September __, 2020 and (ii) the date upon which Guarantor has entered into such amendments of its liquidity covenants with respect to each of its Other Facilities, Section 9(a) of the Guarantee shall be deemed to be automatically modified to conform to the most restrictive of such less restrictive liquidity covenants of the Other Facilities (as amended) (such covenant, the “MFN Liquidity Covenant”); provided that, notwithstanding the foregoing, in no event shall the foregoing cause, and the foregoing shall not cause, the liquidity covenant in Section 9(a) of the Guarantee to be any less restrictive than a liquidity covenant requiring that Guarantor not permit at any time (x) its Liquidity (as defined in the Guarantee on the date hereof) to be less than $150,000,000 or (y) its Cash Liquidity (as defined in the Guarantee on the date hereof) to be less than $50,000,000 (such covenant as described in the preceding clauses (x) and (y), the “Requested Liquidity Covenant”), and in the event that the MFN Liquidity Covenant is less restrictive than the Requested Liquidity Covenant, then on the Liquidity Covenant Modification Effective Date, Section 9(a) of the Guarantee, with no further action required on the part of either Guarantor or Buyer, shall automatically be modified, mutatis mutandis, to conform to the Requested Liquidity Covenant. Guarantor and Buyer each agree, at the request of the other, to execute and deliver any related amendments to the Guarantee to document the modifications contemplated by this paragraph, provided that the execution of any such amendments shall not be a precondition to the effectiveness thereof, but shall merely be for the convenience of Buyer and Guarantor. For the avoidance of doubt, if, on September 17, 2020, Guarantor shall not have entered into amendments with each of the other repurchase buyers under all of the Other Facilities to modify the Guarantor’s liquidity covenants under such Other Facilities to be less restrictive to Guarantor than the liquidity covenant set forth in Section 9(a) of the Guarantee, then this paragraph shall be of no further force and effect, and the liquidity covenant set forth in Section 9(a) of the Guarantee shall remain unmodified.
C. The Borrower has previously advised the Agent that it may not satisfy the Minimum Liquidity Covenant for the Fiscal Quarter ending May 31, 2023 as tested on May 31, 2023 (“May Liquidity Test”) and has requested that the Lenders waive the Borrower’s compliance with the Minimum Liquidity Covenant for the Fiscal Quarter ending May 31, 2023 as tested on May 31, 2023.
(A) In the event that the Credit Parties fail to comply with the Liquidity Covenant (a “Liquidity Covenant Default”) for any Fiscal Quarter (a “Liquidity Cure Quarter”), the then existing direct or indirect equity holders of Holdings shall have the right to make an equity investment, directly or indirectly, (which equity contribution shall not be Disqualified Capital Stock) in Holdings in cash, which Holdings shall contribute, directly or indirectly, to the Borrower in cash (which equity contribution shall not be Disqualified Capital Stock) on or after the last day of such Liquidity Cure Quarter and on or prior to the day that is five (5) Business Days after the Liquidity Reporting Date with respect to such Liquidity Cure Quarter (the “Liquidity Cure Expiration Date”), and such amounts shall be included in the calculation of Unrestricted Cash for the purposes of determining compliance with the Liquidity Covenant (any such equity contribution so included in the calculation of Unrestricted Cash, a “Liquidity Equity Cure Contribution” and the amount of such Liquidity Equity Cure Contribution, the “Liquidity Cure Amount”); provided that such Liquidity Equity Cure Contribution is Not Otherwise Applied (other than, for the avoidance of doubt pursuant to this Section 6.08(b)(ii)(A)); provided further that the provisions of Section 6.08(b)(i)(A) and Section 8.03 shall not apply to any Liquidity Covenant Default. All Liquidity Equity Cure Contributions shall be (x) disregarded for all purposes of this Agreement other than inclusion in the calculation of Liquidity for the purpose of determining compliance with the Liquidity Covenant as of the end of the Liquidity Cure Quarter, including being disregarded for purposes of the determination of the Cumulative Amount and all components thereof and any baskets or other ratios with respect to the covenants contained in Article VI (other than this Section 6.08(b)(ii)(A)) and (y) deemed used pursuant to clause (iv) of the definition of “Not Otherwise Applied” (assuming for all such purposes that the reference therein to “Consolidated EBITDA” shall mean a reference to Liquidity and the reference therein to “Section 8.03(a)” shall mean a reference to this Section 6.08(b)(ii)(A)); provided that any cash so contributed may be counted as Unrestricted Cash for any purpose at any time that such cash otherwise qualified as Unrestricted Cash. Notwithstanding anything to the contrary contained in this Section 6.08(b)(ii)(A), (A) upon receipt of the Liquidity Cure Amount by Holdings (and the subsequent contribution in cash to the Borrower (which equity contribution shall not be Disqualified Capital Stock in the Borrower)) in at least the amount necessary to cause the Borrower to be in compliance with the Liquidity Covenant as of the end of the Liquidity Cure Quarter, the Liquidity Covenant shall be deemed satisfied and complied with as of the end of the Liquidity Cure Quarter with the same effect as though there had been no failure to comply with the Liquidity Covenant, and any Default or Event of Default related to any failure to comply with the Liquidity Covenant shall be deemed not to have occurred for purposes of the Loan Documents, and (B) upon receipt by the Administrative Agent of a notice from the Borrower (a “Liquidity Notice of Intent to Cure”) and through the Liquidity Cure Expiration Date: (i) no Default or Event of Default shall be deemed to have occurred on the basis of any failure to comply with the Liquidity Covenant unless such failure is not cured by the making of a Liquidity Equity Cure Contribution on or prior to the Liquidity Cure Expiration Date, (ii) the Borrower shall not be permitted to borrow Revolving Loans or Swing Line Loans and Letters of Credit shall not be issued or renewed unless and until the Liquidity Equity Cure Contribution is made or all existing Events of Default are waived or cured, (iii) none of the Administrative Agent, the Collateral Agent or any Lender shall exercise any of the remedial rights otherwise available to it upon an Event of Default, including the right to accelerate the Loans, to terminate Commitments or to foreclose on the Collateral solely on the basis of an Event of Default having occurred as a result of a violation of the Liquidity Covenant, unless the Liquidity Equity Cure Contribution is not made on or before the Liquidity Cure Expiration Date and (iv) if the Liquidity Equity Cure Contribution is not made on or before the Liquidity Cure Expiration Date, such Event of Default or potential Event of Default shall spring into existence after such time and the Administrative Agent, the Collateral Agent and any Lender may take any actions or remedies pursuant to this Agreement and the other Loan Documents. No Liquidity Equity Cure Contribution shall be any greater than the minimum amount required for the Borrower to be in compliance with the Liquidity Covenant in the applicable Liquidity Cure Quarter. For the avoidance of doubt, any Liquidity Equity Cure Contribution and any Liquidity Equity Cure Amount shall for all purposes of this Agreement, be treated as an “Equity Cure Contribution” or “Equity Cure Amount”, as applicable. Furthermore, notwithstanding anything to the contrary in Section 8.03, on and after the First Amendment Effective Date, other than for purposes of Section 8.03, all references to the Financial Covenant in this Agreement shall include the Liquidity Covenant.
On July 21, 2023, we agreed with an affiliate of Madryn Asset Management, LP (“Madryn”) to extend the period during which our minimum liquidity covenant is reduced from $3,000,000 to $300,000 (the “Minimum Liquidity Covenant Relief”) under our credit facility with Madryn (the “Credit Facility”). The agreement also extends the due date for the Company’s June 30, 2023 interest payment due under the Credit Facility. The agreement extends both the Minimum Liquidity Covenant Relief and the interest payment deferral that were afforded to the Company in prior amendments to the Credit Facility. The Minimum Liquidity Covenant Relief and the interest payment deferral provided under the agreement will expire July 28, 2023.
Section 8.5 Minimum Liquidity Covenant. (a) On the Closing Date and as of the last day of each fiscal quarter of the Guarantor thereafter (each, a “Minimum Liquidity Test Date”), the amount of Unencumbered Liquidity of the Guarantor shall be equal to or greater than the Minimum Liquidity Amount and for each such Minimum Liquidity Test Date, such Unencumbered Liquidity shall consist of cash (including funds on deposit in the account pledged by the Guarantor to the Administrative Agent pursuant to the Guarantor Account 6 Pledge Agreement and funds on deposit in any other checking, savings, or brokerage accounts (including, solely with respect to the Closing Date, an amount equal to the Minimum Cash Amount deposited by the Guarantor into the Debt Service Reserve Account on the Closing Date)) in an amount equal to or in excess of the Minimum Cash Amount (the covenant set out in this Section, the “Minimum Liquidity Covenant”).
The Amendment also extends the period during which the Company’s minimum liquidity covenant is reduced from $3,000,000 to $300,000 (the “Minimum Liquidity Covenant Relief”). The Minimum Liquidity Covenant Relief afforded under the Amendment is consistent with the relief granted in previous amendments to the Credit Facility and will expire September 30, 2023.
In addition, for all reporting periods through September 30, 2021, the Company will comply with a liquidity covenant that requires the Company to maintain minimum Liquidity of $150.0 million. The Amendment defines “Liquidity” as cash on hand and availability under the Company’s receivables-based credit facility and Revolving Credit Facility. The Amendment also provides for an equity cure in the event the Company fails to comply with the liquidity covenant as of the last day of any calendar month, pursuant to which the cash proceeds of any direct equity investment in the Company made during the period ending 10 business days following the failure to comply with the liquidity covenant will be included in the calculation of Liquidity for purposes of determining compliance with the liquidity covenant for that month, subject to certain conditions.
10.01 Minimum Liquidity. The Obligors shall maintain at all times Liquidity (which for certainty shall exclude amounts in the Italian Account and the Escrow Account) in an aggregate amount which shall exceed (i) $5,000,000 from the date hereof to and including December 31, 2018, (ii) $10,000,000 beginning January 1, 2019 until the commencement of the Liquidity Covenant Waiver Period, (iii) $0 during the Liquidity Covenant Waiver Period, and (iv) $10,000,000 following the conclusion of the Liquidity Covenant Waiver Period and thereafter.
Lender shall test Borrowers’ compliance with the minimum Liquidity covenant set forth in clause (a) of this Section 6.7 on April 15, 2021. Thereafter, Lender shall test Borrowers’ compliance with the minimum Liquidity covenant as of April 30, 2021 and as of the last day of each month thereafter; provided that if and when Borrowers’ make a principal prepayment on the Equipment Loan in an amount not less than $3,000,000, Borrowers’ shall have no further obligation to comply with the minimum Liquidity covenant and Lender shall cease testing Borrowers’ compliance with that covenant. Lender shall test Borrowers’ compliance with the minimum gross revenue covenant set forth in clause (b) of this Section 6.7 monthly, commencing as of March 31, 2021 and continuing as of the last day of each month thereafter, in each case with respect to the trailing three-month period ending on such date. For clarity, the modification to the Liquidity covenant set forth in Section 6.7(a), above is effective as of and for all dates beginning on and after January 1, 2021.
For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the Interest Coverage Covenant and the Leverage Covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, the Company must instead maintain minimum liquidity of $450.0 million, increasing to $550.0 million if the Company or its subsidiaries receives cash proceeds from certain capital markets transactions (the “Liquidity Covenant”) (with liquidity being the sum of certain cash and cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the Amended Credit Agreement). • For the fiscal quarter ending September 30, 2021, the Interest Coverage Covenant is suspended, the Leverage Covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and the Company must comply with the Liquidity Covenant. • For the fiscal quarter ending December 31, 2021, the Interest Coverage Covenant is suspended, the Leverage Covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and the Company must comply with the Liquidity Covenant. • Beginning on January 1, 2022, the Liquidity Covenant is terminated. For the fiscal quarter ending March 31, 2022, the Leverage Covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the Interest Coverage Covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
Notwithstanding anything to the contrary contained in this Guarantee, Guarantor and Buyer agree that, if (a) Guarantor has entered into amendments of its liquidity covenants with each of the other repurchase buyers under all repurchase facilities that currently (or as of the Liquidity Covenant Modification Effective Date (as defined below)) have liquidity covenants more favorable to such repurchase buyers than the Requested Liquidity Covenant (as defined below) (such repurchase facilities, the “Other Facilities”) to which Guarantor is a party or with respect to which Guarantor is obligated (either as a primary or secondary obligor) on or before April 10, 2020, and (b) in all of such amendments to the Other Facilities, Guarantor’s liquidity covenant has been modified to be less restrictive to Guarantor than the liquidity covenant expressly set forth in Section 15(c) hereof, then Guarantor will give Buyer prompt notice thereof and, upon the earlier of (such earlier date, the “Liquidity Covenant Modification Effective Date”) (i) April 10, 2020 and (ii) the date upon which Guarantor has entered into such amendments of its liquidity covenants with respect to each of its Other Facilities, Section 15(c) of this Guarantee shall be deemed to be automatically modified to conform to the most restrictive of such less restrictive liquidity covenants of the Other Facilities (as amended) (such covenant, the “MFN Liquidity Covenant”); provided that, notwithstanding the foregoing, in no event shall the foregoing cause, and the foregoing shall not cause, the financial covenant in Section 15(c) of this Guarantee to be any less restrictive than a liquidity covenant requiring that Guarantor not permit at any time (x) its Liquidity (as defined in the Repurchase Documents on the date hereof) to be less than $150,000,000 or (y) its Cash Liquidity (as defined in the Repurchase Documents on the date hereof) to be less than $50,000,000 (such covenant as described in the preceding clauses (x) and (y), the “Requested Liquidity Covenant”), and in the event that the MFN Liquidity Covenant is less restrictive than the Requested Liquidity Covenant, then on the Liquidity Covenant Modification Effective Date, Section 15(c) of this Guarantee, with no further action required on the part of either Guarantor or Buyer, shall automatically be modified, mutatis mutandis, to conform to the Requested Liquidity Covenant; and provided, further, that, for the avoidance of doubt, Section 15(c) of this Guarantee shall at all times be subject in all respects to Section 27 of this Guarantee. Guarantor agrees, at Buyer’s request, to execute and deliver any related amendments to this Guarantee to document the modifications contemplated by this paragraph, provided that the execution of any such amendments shall not be a precondition to the effectiveness thereof, but shall merely be for the convenience of Buyer and Guarantor.
SECTION 2. WAIVER 2.1. Effective as of December 31, 2019, Lender hereby waives any Event of Default for violations of the Minimum Liquidity Covenant as of such date, including any failure to notify Lender of such Event of Default. 2.2. Effective as of the date hereof Lender hereby waives any Event of Default for violations of the Minimum Liquidity Covenant during the period beginning on January 1, 2020 and ending on the last date of the Forbearance Period, including any failure to notify Lender of such Event of Default.
A liquidity covenant is a financial stipulation included in loan agreements or credit facilities, designed to ensure that the borrower maintains a certain level of liquidity. It acts as a safeguard for lenders by requiring the borrower to uphold enough liquid assets, such as cash or cash equivalents, to cover short-term obligations and potential downturns in business.
A liquidity covenant should be used in scenarios where maintaining liquidity is crucial for the borrower’s operational stability and for the lender’s risk management. This includes:
Writing an effective liquidity covenant involves specifying clear metrics and conditions that the borrower must adhere to. Here’s a general structure:
Example: “The Borrower shall maintain at all times a minimum liquidity, defined as unrestricted cash and cash equivalents, of not less than $500,000, measured on a quarterly basis. In the event that the Borrower fails to meet this requirement, the Lender reserves the right to call for immediate repayment of the outstanding loan balance.”
Liquidity covenants are typically included in:
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