This week we continue our conversation with Jessica Reiss and Justin Forlenza, attorneys with Covenant Review. Begun in 2006, Covenant Review is the world’s first boutique research firm focused on bond and loan covenants. Second of two parts – View part one

The Lead Left: MFN is triggered if the company raises debt priced 50 bps from the existing debt.

Justin Forlenza: That’s correct. Lenders are always asking if prospective financings are subject to MFN.

Jessica Reiss: Another example of term erosion is something called “re-classification.” For covenants and incremental debt facilities it’s common on bond documents to have a ratio, for example, 2.0x interest coverage, above which the borrower can issue any debt. However, if the company has dollar-based baskets, they can go up those levels even if the interest coverage is less than 2.0x.

JF: The catch is even if the company has no access to the ratio basket, they can retroactively apply it later after they use it, and still have the dollar-based baskets free and clear.