Our special series on envelope-pushing in the world of loan covenants continues with a look at “limited condition transaction” provisions. These provisions allow the borrower to decide, at its option, when it wants to test the conditions to entering into a transaction (typically an acquisition) that is not subject to a financing condition – sometimes described as a “no-outs” acquisition.

If the borrower enters into a definitive purchase agreement for one of these acquisitions, the limited condition transaction provisions allow it to elect to test whether it can satisfy the financial tests applicable to that acquisition (and the related funding, under the credit facility, if there is one) at the time of signing rather than at deal closing.

With such transactions, the borrower may include the debt incurred and Ebitda acquired in that transaction at the time of signing, even though the deal hasn’t actually closed yet. In addition, if another transaction occurs after signing, but before closing, the borrower still gets to “count” the transaction that is in process as if it has closed — although if the new transaction is a dividend, issuers aren’t typically permitted to include the target’s Ebitda until the in-process acquisition has actually closed.