Like the New York Giants, equity cures have made a comeback here in the fourth quarter — even without the help of Eli Manning.


Eli Manning

An equity cure right is a provision that’s included in the loan agreement for a sponsor finance deal, giving the private equity sponsor that owns the borrower the right to put in additional cash to cure a default under a financial covenant.  So, for example, if the company breaches its leverage ratio for the quarter (either because it has too much debt or too little EBITDA), the sponsor can make a cash contribution to the company after the quarter-end, and that cash will be added to the company’s EBITDA number for that quarter (as if it represented actual earnings), to put the company back into compliance with the covenant.  Once the cash is contributed, the financial covenant default is considered cured.

Back in the day (remember 2006, anyone?) an equity cure right might have contained relatively few limitations on the sponsor’s ability to exercise it.  It was not unusual for there to be a very large cap (or sometimes none at all) on the amount that could be contributed, with relatively long periods of time in which to put in the money.  Though there were often restrictions on the number of cures that could be made (both in the aggregate and the number per year), these were often negotiated to permit very frequent cures.  We also sometimes saw permission to put the cash in as subordinated debt rather than equity, and other bells and whistles, depending on the size and type of the sponsor.  All of this was heavily negotiated.

When the credit markets tightened up, we didn’t see equity cure provisions in new deals very often.  Now we’re seeing them again all over the place — but with somewhat more restraint in what’s permitted.  Though there are a few outliers, it’s often the case that the cash must be contributed as equity, within a few days of the quarter-end financials being produced.   There is almost always a cap on the number of cures permitted — often one per fiscal year and/or three over the life of the deal.   There may sometimes even be a requirement that the cash be used to pay down the amounts outstanding under the loan, rather than just treating the cash as additional EBITDA and keeping it on the books.  Though there’s definitely willingness to allow equity cures again, lenders seem to be a bit less eager to permit very broad rights.

I’d be interested to know if any of you are seeing even more flexibility in equity cure provisions these days, and whether you think we’ll end up with similar terms to what we saw in 2005-2006.  Email me or post  a comment here with your thoughts.