A revolving credit facility can be drawn only while the borrower can sign a paragraph
confirming that no default is continuing and that the repeating representations — which
include compliance with the financial covenants — are true. So the facility is available
exactly while it is not needed. On the company in this book the covenant is met until EBITDA falls
to 132,666,666.67, which at an operating leverage of
2.5 is a fall in annual
revenue of 8.4127 per cent.
The arithmetic, in four lines
Gross debt is 550,000,000.00. The facility nets cash to which a group member has free and
unrestricted access, not subject to security, and freely repatriable — which on this balance
sheet is 152,000,000.00, not the 214,000,000.00 in the accounts. Covenant net debt
is therefore 398,000,000.00 and leverage is 2.3690×, against
3.0000× of covenant.
Step
Figure
Covenant net debt (gross less accessible cash)
398,000,000.00
Divided by the covenant of 3.0000×
132,666,666.67
Fall from EBITDA of 168,000,000.00
21.0317 per cent
At an operating leverage of 2.5, a fall in annual revenue of
8.4127 per cent
Covenant EBITDA is measured over the trailing four quarters, so this is an annual fall, not a quarter.
Run the same computation on the cash the board deck nets — all
214,000,000.00 of it — and the facility survives a revenue fall of
13.3333 per cent.
The board and the lender are looking at the same facility and are
4.9206 per cent
of revenue apart on when it disappears. The gap is the trapped and restricted cash the
agreement does not net.
What leaves with it
The facility is 250,000,000.00 of a headroom of 370,608,000.00, which is
67.4567 per cent of the group's liquidity. What remains when it goes
is 27,403,718.84 above the company's own minimum —
5.2377 business days of its own payments.
With the facility
Without it
Available cash
120,608,000.00
120,608,000.00
Undrawn revolver
250,000,000.00
0.00
Headroom
370,608,000.00
120,608,000.00
Minimum it is tested against
93,204,281.16
93,204,281.16
Over the minimum
277,403,718.84
27,403,718.84
The operating float is held back from available cash, so it is not counted again in the minimum.
The price of liquidity that does not leave
There are three ways to hold 250,000,000.00, and they do not cost the same.
Way
How
Cost a year
A. Undrawn revolver
commitment fee 1,312,500.00 plus the amortised upfront fee 250,000.00
1,562,500.00
B. Term debt held on deposit
negative carry of 2.15 per cent plus the loan's own arrangement fee
5,625,000.00
C. Revolver drawn, proceeds on deposit
4.50 per cent paid less 2.60 per cent earned, plus the amortised fee
5,000,000.00
Premium of B over A
the price of liquidity with no drawstop
4,062,500.00
B costs 3.60 times A.
As a share of the 250,000,000.00 it insures, the premium is
1.6250 per cent a year. That is the threshold, and it is the
honest form of the answer: paying it is worth doing if the probability-weighted cost of being
short 250,000,000.00 in a bad quarter exceeds 1.6250 per cent. Nobody can
hand you that probability. Everybody can hand you the premium.
The defensive draw, and what it is not
The representation is made on the utilisation date, not on the test date. On any day before the
covenant fails the paragraph can be signed and the facility drawn. Gross debt rises by
250,000,000.00; cash rises by the same amount; net debt does not move and leverage stays at
2.3690×. What changes is the composition of the headroom.
But a drawn balance is held, not unconditional. A covenant breach is an event of
default, on which the lenders may cancel the commitments and accelerate what is drawn; and a
deposit placed with a lending bank is exposed to that bank's right of set-off. Cash drawn
defensively belongs with a bank that is not a lender under the facility. Converting the whole
facility from A to C costs 3,437,500.00 a year more than leaving it undrawn.
What to do with this
Put two figures on the monthly treasury report. The first is the headroom with and without the
committed facility. The second is the fall in annual revenue at which the facility is no longer
available, computed on the definition of cash in the agreement rather than the one in the deck.
On this company that is 8.4127 per cent — a number the sales director can
recognise, which is the point of converting it.
The workbook behind this article
Every figure above is a live formula in the companion files for
Treasury Management — the five readings of cash, the liquidity
test, working capital and the discount, and the hedging book. Each file ends with a Checks
sheet setting the printed figure beside the computed one. They are free, and they need no
account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.