A pharma company's loan caps net debt at 3.5 times EBITDA. Net debt is Rs 1,200 crore and EBITDA has fallen from Rs 400 crore to Rs 300 crore after a regulator's warning letter on a plant. Compute the breach and the equity cure, and decide as lender between a waiver, a reset and acceleration.

Leverage has moved from 3.0x to 4.0x against a 3.5x covenant; an equity cure of Rs 150 crore brings it back. As lender, choose a reset rather than a waiver or acceleration: a temporary higher covenant while the plant is fixed, paid for with the promoter's Rs 150 crore, a dividend block, tighter reporting and remediation milestones. Interest is being paid; accelerating would turn a fixable problem into a default.

Net debt is unchanged at Rs 1,200 crore, but it now sits on Rs 300 crore of EBITDA instead of Rs 400 crore. Leverage has jumped from 3.0x to 4.0x without Oshana borrowing a rupee more, because a ratio covenant moves with earnings. Before the letter Oshana had room for EBITDA to fall 14.3%, to Rs 343 crore, before breaching. It fell 25%.

Work backwards from the covenant. At EBITDA of Rs 300 crore, 3.5x allows Rs 1,050 crore of net debt. Rs 150 crore of new equity used to repay debt brings Oshana back to exactly 3.5x. Some agreements instead let a cure be added to EBITDA; that would need only Rs 42.9 crore, because each rupee added to EBITDA is multiplied by 3.5. Lenders dislike that version for exactly that reason, and whether it is allowed, how often, and how the cure is counted depends on the loan agreement, which you should read before quoting either number.

A tenant who loses a month's pay after an accident but has always paid rent is not evicted on day one; the landlord agrees a plan. A covenant breach gives the lender the right to renegotiate, not an obligation to call the loan, and the choice turns on whether the problem is temporary and whether the lender is better off inside the tent. A waiver forgives the breach for one test date: too generous here, because the plant problem will last three or four quarters. Acceleration demands repayment now: Oshana cannot pay Rs 1,200 crore, cross-default clauses would fire across its other borrowings, and the bank would end up enforcing on a plant under a warning letter, the worst time to sell it. A reset raises the covenant for a set period, say to 4.5x for four quarters stepping back to 3.5x, in exchange for the promoter's Rs 150 crore, no dividends until compliance, a higher margin, monthly reporting and milestones for the remediation.

Say what would change the view. If the regulator's letter points to data integrity problems across several plants, recovery is uncertain, and the reset should be shorter with tighter triggers. If the promoter will not put in equity, the bank should ask why the owner is less willing than the lender to back the business.