It counts until the quarter you need it. The revenue fall that removes it is computable, and on this company it is smaller than the board believes.
A revolving credit facility can be drawn only while the borrower can sign a paragraph confirming that no default is continuing and that the repeating representations — which include compliance with the financial covenants — are true. So the facility is available exactly while it is not needed. On the company in this book the covenant is met until EBITDA falls to 132,666,666.67, which at an operating leverage of 2.5 is a fall in annual revenue of 8.4127 per cent.
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Gross debt is 550,000,000.00. The facility nets cash to which a group member has free and unrestricted access, not subject to security, and freely repatriable — which on this balance sheet is 152,000,000.00, not the 214,000,000.00 in the accounts. Covenant net debt is therefore 398,000,000.00 and leverage is 2.3690×, against 3.0000× of covenant.
| Step | Figure |
|---|---|
| Covenant net debt (gross less accessible cash) | 398,000,000.00 |
| Divided by the covenant of 3.0000× | 132,666,666.67 |
| Fall from EBITDA of 168,000,000.00 | 21.0317 per cent |
| At an operating leverage of 2.5, a fall in annual revenue of | 8.4127 per cent |
Run the same computation on the cash the board deck nets — all 214,000,000.00 of it — and the facility survives a revenue fall of 13.3333 per cent. The board and the lender are looking at the same facility and are 4.9206 per cent of revenue apart on when it disappears. The gap is the trapped and restricted cash the agreement does not net.
The facility is 250,000,000.00 of a headroom of 370,608,000.00, which is 67.4567 per cent of the group's liquidity. What remains when it goes is 27,403,718.84 above the company's own minimum — 5.2377 business days of its own payments.
| With the facility | Without it | |
|---|---|---|
| Available cash | 120,608,000.00 | 120,608,000.00 |
| Undrawn revolver | 250,000,000.00 | 0.00 |
| Headroom | 370,608,000.00 | 120,608,000.00 |
| Minimum it is tested against | 93,204,281.16 | 93,204,281.16 |
| Over the minimum | 277,403,718.84 | 27,403,718.84 |
There are three ways to hold 250,000,000.00, and they do not cost the same.
| Way | How | Cost a year |
|---|---|---|
| A. Undrawn revolver | commitment fee 1,312,500.00 plus the amortised upfront fee 250,000.00 | 1,562,500.00 |
| B. Term debt held on deposit | negative carry of 2.15 per cent plus the loan's own arrangement fee | 5,625,000.00 |
| C. Revolver drawn, proceeds on deposit | 4.50 per cent paid less 2.60 per cent earned, plus the amortised fee | 5,000,000.00 |
| Premium of B over A | the price of liquidity with no drawstop | 4,062,500.00 |
As a share of the 250,000,000.00 it insures, the premium is 1.6250 per cent a year. That is the threshold, and it is the honest form of the answer: paying it is worth doing if the probability-weighted cost of being short 250,000,000.00 in a bad quarter exceeds 1.6250 per cent. Nobody can hand you that probability. Everybody can hand you the premium.
The representation is made on the utilisation date, not on the test date. On any day before the covenant fails the paragraph can be signed and the facility drawn. Gross debt rises by 250,000,000.00; cash rises by the same amount; net debt does not move and leverage stays at 2.3690×. What changes is the composition of the headroom.
But a drawn balance is held, not unconditional. A covenant breach is an event of default, on which the lenders may cancel the commitments and accelerate what is drawn; and a deposit placed with a lending bank is exposed to that bank's right of set-off. Cash drawn defensively belongs with a bank that is not a lender under the facility. Converting the whole facility from A to C costs 3,437,500.00 a year more than leaving it undrawn.
Put two figures on the monthly treasury report. The first is the headroom with and without the committed facility. The second is the fall in annual revenue at which the facility is no longer available, computed on the definition of cash in the agreement rather than the one in the deck. On this company that is 8.4127 per cent — a number the sales director can recognise, which is the point of converting it.
Only while the borrower can certify compliance with its covenants, because a utilisation requires the repeating representations to be true. On the company in this book the facility is 67.4567 per cent of liquidity headroom and stops being available at a fall in annual revenue of 8.4127 per cent.
Divide covenant net debt by the leverage covenant to get the EBITDA at which the test is exactly met (398,000,000.00 / 3.0000× = 132,666,666.67), express it as a fall from current EBITDA (21.0317 per cent), then divide by operating leverage to convert it into revenue (8.4127 per cent).
On this company, 4,062,500.00 a year: 5,625,000.00 to hold the amount as term debt on deposit against 1,562,500.00 to hold it as an undrawn revolver. That is 1.6250 per cent a year of the amount insured.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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