Meridian Precision: covenant breach, waiver and a request for more money

Rebuild the covenant, do not accept the certificate

• Test the EBITDA definition line by line: are the EUR 3.4m customer losses genuinely non-recurring, and were run-rate synergies added back for the acquisition before they were earned? Ask for the acquisition completion accounts and trailing twelve-month EBITDA of the target.
• A pro forma permission is not a warranty that EBITDA arrives. If the target delivered EUR 0.6m rather than the EUR 1.8m assumed, the breach is a diligence and monitoring failure, not bad luck, which changes the tone of the waiver.

Quantify the December cliff

• At a 3.50x test on net debt of EUR 94.6m, covenant EBITDA must be EUR 27.0m. The company therefore needs EUR 2.9m of EBITDA recovery or EUR 10.2m of debt reduction in nine weeks, before considering normal seasonality.
• Model base, downside and severe cases for EBITDA and working capital. If the downside case still breaches at a reset level, a waiver alone is a deferral of the decision.

Liquidity versus covenant

• Cash of EUR 5.1m plus EUR 8m undrawn equals EUR 13.1m. Build a 13-week direct cash flow and identify the seasonal peak, payroll, tax and supplier step-downs. The EUR 8m request may be a liquidity need disguised as a covenant request, which justifies a different instrument and pricing.

Credit fundamentals and recovery

• Concentrations after the insolvency, receivables ageing, supplier terms, capex commitments, pension and tax arrears, and any cross-default in hedging or local lines.
• Security package and a realistic enterprise value: enforcement in a stressed industrials sale typically destroys more value than a negotiated reset, but only if management is credible.
• Sponsor behaviour: ability and willingness to inject equity now, and whether the dividend request is a red flag about intent.

Local legal and classification

• Have counsel confirm whether the breach is a default and whether a standstill is needed while the syndicate decides.
• A waiver granted because of financial difficulty is forbearance: expect Stage 2 classification, revised probabilities of default and a specific provisioning recommendation.

Covenant and waiver architecture

• Waiver through June with a reset ladder: 4.50x at December, 4.00x at March, 3.75x at June, then reverting. A flat waiver for nine months teaches the borrower that covenants are optional.
• Tighten definitions: no synergy add-backs, no EBITDA credit for acquisitions until twelve months of ownership, tighter capex and working-capital adjustments, and a minimum liquidity covenant of EUR 6m tested monthly. A leverage covenant alone is too slow in a deteriorating credit.

Price and fees

• Waiver fee of 50bps on commitments, margin uplift of 75bps on the term loan and 100bps on the RCF, plus a 25bps commitment fee on undrawn. The bank is being asked to accept more risk and should be paid for it.

The distribution request

• Decline it. Paying EUR 5m out while asking for covenant relief and more liquidity is value leakage from creditors. Any permission should be conditional on leverage below 2.50x and no default, and should be capped.

RCF increase

• Do not add EUR 8m of committed bullet liquidity on a 3.92x credit. Structure it as an availability-tested facility: borrowing base of eligible receivables and inventory, 18-month maturity, secured, springing leverage test, and clean-up to zero for 30 consecutive days each year.
• Alternative: existing lenders provide it pro rata, with the sponsor injecting equity first. New money must buy priority, not just headline capacity.

Controls and information

• Monthly management accounts within 20 days, 13-week rolling cash flow, bi-weekly lender calls, and an independent business review at the company's cost if the December test is missed or liquidity falls below EUR 8m.
• Mandatory prepayment from asset sales, insurance proceeds and 50% excess cash sweep; no acquisitions, no new debt, no share buybacks.
• Equity cure rights limited to two occasions and capped, with the cure treated as EBITDA not debt.

Conditions precedent

• No default other than the waived breach, fees paid, updated KYC and confirmation from the syndicate. Document all consents through the facility agent to respect pro rata treatment.

Work out the arithmetic first

• Our EUR 17m term loan is 20% of EUR 85m. The 66 2/3% threshold can be met without us, so a lone refusal by a EUR 3m holder cannot block the waiver and its threat to accelerate is weak in practice: it would still be bound by pro rata sharing and would likely have to fund litigation.
• Check what is actually being asked. A financial covenant waiver usually needs majority consent. Anything touching pro rata sharing, maturity, amortisation schedules or security is likely a sacred right needing all-lender or higher consent. If the package includes rescheduling or the RCF increase, the agent may have mis-classified the consent level, and that is the real risk.

Our vote

• Vote in favour conditional on the terms being reflected in the waiver letter. The alternative, acceleration and enforcement, produces a lower recovery in a business with EUR 24m EBITDA and a pipeline of customer losses.
• Do not trade a yes for a bilateral side benefit. Side letters breach pro rata sharing and expose the bank commercially and legally.

Process risks

• Insist on a standstill agreement dated from the breach so no lender can accelerate while the consent is solicited; otherwise the dissenter creates a race.
• Require the agent to issue one consolidated consent solicitation with a hard deadline, a clear statement of the consent level, and confirmation that all lenders receive the same information.
• Avoid disclosing syndicate positions or the dissenter's stance; keep all communication through the agent.
• Consider whether the bank wants to buy the dissenter's EUR 3m at a discount to remove noise. If so, use a documented assignment at arm's length, check insider dealing restrictions and obtain internal approval.
• Revisit our role: as documentation agent we have no fiduciary duty to the syndicate, but we do have an agency function. Keep instructions in writing and separate origination from agency decision-making.
• Finally, confirm the internal classification consequence of a conditional waiver and book any required provision or watch-list entry in the same credit committee minute.