A food company has Rs 700 crore of debt, Rs 50 crore of cash and a 3.5x net leverage covenant. EBITDA falls from Rs 200 crore to Rs 170 crore. Is the covenant breached, how much headroom was there, and how large an equity cure fixes it?

Yes: net leverage rises from 3.25x to 3.82x, through the 3.5x line. Net debt is 700 less 50, Rs 650 crore. Nayaka could only lose Rs 14.3 crore of EBITDA, about 7%, before breaching. A cure that cuts net debt must be Rs 55 crore; if the agreement counts the cure as EBITDA, Rs 15.7 crore is enough.

Measure headroom in EBITDA, not in turns of leverage. At 3.25x against a 3.5x limit the gap looks like a quarter turn, but it means EBITDA can fall only to Rs 185.7 crore, a 7.1% drop. A household that spends 90% of its income has 10% headroom on paper, but one month of lost overtime wipes it out. Seen from the debt side, Nayaka could have borrowed Rs 50 crore more at Rs 200 crore of EBITDA. Either way, a cost spike of the kind food companies see every few years uses it all.

It depends on what the equity cureA right in a loan agreement letting the owners put in new equity after a covenant breach, which is then counted as if it had improved the ratio. is allowed to touch. If the cash goes to cut net debt, it must take net debt down to 3.5 times 170, Rs 595 crore, so the cure is Rs 55 crore. If the agreement treats the cure as added EBITDA, the sponsor only needs to lift EBITDA to Rs 185.7 crore, a cure of Rs 15.7 crore. That is the same breach fixed with about a third of the money, which is why sponsors negotiate for EBITDA cures and lenders resist them.

A cure buys one test date, not a fixed business. If costs stay high, EBITDA of Rs 170 crore is the new normal and the next quarter fails again. Agreements usually limit how often a cure can be used and whether it can be used in consecutive quarters; read the clause before promising the partner anything, because the exact limits differ by agreement. The alternatives are asking lenders for a covenant reset in exchange for a fee and a higher margin, or prepaying debt from a disposal. A fund that cures once and then resets on better terms has used the cure well.

Close with the limit of the arithmetic. EBITDA in a covenant is defined by the agreement, often with add-backs for one-off costs, so the reported Rs 170 crore may not be the covenant figure. If the agreement lets Nayaka add back, say, a one-off plant shutdown cost, the breach could shrink or vanish. The first question a leveraged finance banker asks is which EBITDA the covenant uses.