Most credit agreements test covenant compliance whenever a borrower actually uses its credit — not just when it first qualified. Limited Condition Transaction terms change that, and they're becoming more common in acquisition financing.
Highlights
- LCT terms let borrowers lock in covenant compliance at signing, even if the numbers shift before the deal closes months later.
- 25% of publicly filed high-yield credit agreements included LCT terms in Q3 2024, up from 23% in Q3 2023.
- Recent deals for 8x8, Phibro Animal Health, and PAR Technology all included LCT provisions.
By Dan Wertman, originally published on the Noetica blog, now part of Thomson Reuters. December 2024.
What if you had to get re-qualified for your credit limit every time you used your card? That’s roughly what most corporate borrowers have to do today, unless their credit agreement says otherwise.
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How LCT terms work
When a credit card company approves you, the process is simple: you prove you can support the credit limit, you get approved, and the company trusts you’re still qualified the next time you use the card — it doesn’t re-run the approval process on every purchase.
“Limited Condition Transaction” (LCT) terms work the same way for corporate borrowers. If a borrower meets the incurrence test for debt when it signs a transaction — say, an acquisition via a stock purchase agreement — an LCT election deems it to still meet those conditions when the transaction closes months later, even if a drop in EBITDA means the company would no longer comply with the same test at closing.
From an issuer’s perspective, this term is critical to making sure a signed deal can actually close, without having to re-qualify against numbers that may have moved in the meantime.
Who is using them
LCT terms are becoming more common, though they still aren’t in a majority of deals. Noetica’s data found LCT terms in 25% of publicly filed high-yield credit agreements in Q3 2024, up from 23% in Q3 2023 — real growth, but still far from standard market practice.
Recent deals that included the term: 8×8 (represented by Skadden, Arps, Slate, Meagher & Flom), Phibro Animal Health (represented by Kirkland & Ellis), and PAR Technology (represented by Gibson Dunn).
For more deal-term benchmarking like this, explore the latest Capital Markets Radar Report from Noetica, now part of Thomson Reuters.
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