Glossary
A clause requiring the borrower to maintain specified financial ratios (e.g., leverage, interest cover) tested at regular intervals, breach of which constitutes an event of default.
Covenants, Events of Default, and Intercreditor Agreements
from Banking & Finance
Lenders protect themselves through covenants — contractual restrictions on the borrower's behaviour. Financial covenants require the borrower to maintain specified financial ratios — for example, a leverage ratio (net debt to EBITDA) or an interest cover ratio (EBITDA to interest expense). If a ratio is breached, the borrower is in default. Information covenants require regular delivery of financial statements and compliance certificates. General undertakings restrict the borrower from doing things like disposing of major assets, incurring additional debt, or changing its business without lender consent. When there are multiple layers of debt, an intercreditor agreement (ICA) governs the relationship between different classes of lender — who gets paid first if things go wrong, who can enforce security, and what happens in a restructuring. The ICA is often the most heavily negotiated document in a leveraged deal.
Facility Agreement
The core lending contract between borrower and lenders, setting out the terms of the loan including amount, interest rate, repayment schedule, covenants, and events of default.
Syndicated Loan
A loan provided by a group of lenders (the syndicate), coordinated by an arranging bank, spreading the credit risk of a large facility across multiple institutions.
LMA (Loan Market Association)
The trade body that publishes standard-form loan documentation used as the starting point for most European syndicated loan and leveraged finance transactions.
Leveraged Buyout (LBO)
An acquisition funded predominantly with borrowed money, typically by a private equity sponsor, where the debt is secured against the acquired company's assets and cash flows.
SONIA
The Sterling Overnight Index Average — the near risk-free benchmark interest rate that replaced LIBOR for sterling lending, based on actual overnight transactions in the sterling money market.
Intercreditor Agreement (ICA)
A contract between different classes of lender governing priority of repayment, rights to enforce security, and conduct during a restructuring — critical in leveraged deals with multiple debt tranches.
Security Package
The bundle of charges, pledges, and assignments granted by the borrower and its group companies over their assets in favour of lenders, providing collateral for the loan.