Equity Cure

Meaning

Debt recovery mechanisms allow a company to rectify a breach of financial covenants by injecting new capital into the business. An equity cure typically involves the shareholders providing cash to improve the ratio of debt to earnings or to boost liquidity levels. This provision prevents a technical default from triggering an immediate acceleration of the loan.

Covenant Restoration

Financial ratios often require a borrower to maintain a specific level of performance relative to its debt load. When a downturn occurs, an equity cure provides a path to bring the company back into compliance without renegotiating the entire credit agreement. The cash injection is usually treated as an increase in the earnings of the previous period.

Structural Limitation

Lenders often limit the number of times this remedy can be used within a specific timeframe. A typical equity cure might be restricted to two consecutive quarters or four times over the life of the loan.

Capital Allocation

Shareholders must weigh the cost of providing new funds against the risk of losing control of the asset to the bank. Using an equity cure demonstrates a commitment to the long-term viability of the operation. It preserves the existing management structure while the company works toward operational recovery.

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Secondary Collateral Mortgage Intercreditor Agreement Trade Credit

Mitigating Springing Covenant Default Triggers under Stressed Net Orderly Liquidation Values

Mitigate springing covenant defaults by restructuring eligible inventory categories, pledging secondary collateral, and instituting temporary availability reserves.

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Cash Conversion Cycle Dilution Reserve Fixed Charge Coverage

Managing Debt Covenant Headroom and Borrowing Base Limits during Scale

Growth consumes collateral headroom through debtor concentration, dilution reserves, and inventory appraisal markdowns before collections fund the gap.

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Lower of Cost and Net Realizable Value Net Debt to EBITDA Trade Credit Insurance

Structured Credit Facility Covenant Compliance during Currency Devaluation and Reserve Trapping

Central bank foreign currency trapping instantly invalidates foreign cash from eligible facility liquidity, driving automatic leverage covenant breaches.

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Net Orderly Liquidation Value Delivered Duty Paid Inventory Write Down

Covenant Breaches Driven by Sinking Inventory Collateral Values during Extended Maritime Shipping Delays

Maritime freight delays drain liquidity by inflating landed stock costs and triggering borrowing base carve-outs that cause sudden covenant breaches.

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Days Sales Outstanding Leverage Covenant Borrowing Base

Structuring Trade Finance Covenants against Inventory Volatility and Customer Settlement Delays during Scale

Dynamic borrowing base covenants with strict eligibility carve-outs and concentration caps prevent cash depletion when scaling extends customer settlement cycles.

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