What is an equity cure provision?

An equity cure provision is a specific clause often included in loan agreements, particularly in the context of leveraged loans or high-yield debt. This provision allows a borrower to address or remedy covenant breaches by injecting equity into the company. When a borrower violates certain financial covenants, such as maintaining specified leverage or interest coverage ratios, the equity cure provision enables them to restore compliance with these covenants by contributing additional equity capital.

This infusion of capital from equity investors can be critical for companies facing financial stress, as it demonstrates a commitment to the business and may stabilize their financial position. It provides lenders with an added layer of security, as it signals that the borrower can potentially rectify its financial situation without needing to restructure or default. The flexibility of this clause can help companies avoid potential defaults while maintaining positive relationships with their creditors.

Understanding this provision is essential in the context of capital structuring and financial management, as it illustrates the interplay between equity financing and debt obligations.