Equity cure rights give the borrower (specifically the borrower’s financial sponsor) the right, but not the obligation, to increase its calculated earnings before interest, tax, depreciation and amortization through an equity contribution. This right becomes relevant when the borrower has failed to satisfy one or more of its EBITDA-based financial covenants.
The equity cure right has gained significant acceptance in all ranges of the middle market for sponsor-backed deals. It is a loan provision that is consistently requested by knowledgeable sponsors and one that lenders have grown comfortable including in their loan documents with appropriate lender safeguards.
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