As we wrap up our special series on how credit agreement terms are eroding, we asked our distinguished team of lawyers from Morgan Lewis: What should we expect, as issuers and credit providers, to come up in deals with financial covenants?

“Financial maintenance covenants are often included in loan documents, even in larger deals,” said Matthew Schernecke. “They’re frequently set at 25%-40% cushions to a sponsor’s model. It’s becoming unusual to see significant step-downs in financial covenant levels over the loan term.

“We see a net leverage ratio covenant in most deals that have a financial covenant,” he continued, “permitting the borrower to net unrestricted cash in calculating leverage. In smaller deals, we push for limits on the amount of cash that may be netted. We also push for only netting cash in controlled accounts, not all unrestricted cash.”

As we’ve noted in this series, many covenant carve-outs or exceptions are tied to pro forma leverage ratio calculations. Defining “pro forma” is as much art as science.