MacrosLM Finance Knowledge
LOAN COVENANTS  /  HIGH-YIELD CREDIT  /  CASE: CVNA

§ 01The three covenant families · what they do

Every loan agreement organises commitments into three buckets. Affirmative covenants force the borrower to do things; negative covenants forbid them from doing things; financial covenants force them to maintain ratios. The pain shows up where the borrower's intent collides with one of these three.
Covenant family · operating definition
FamilyWhat it doesCarvana example
1. AffirmativeRequired actions — "you shall"Deliver audited financials within 90 days of FYE; maintain insurance; pay taxes
2. NegativeForbidden actions — "you shall not"Limit on additional senior debt; restricted-payments basket; asset-sale sweep; lien limits
3. FinancialMaintenance & incurrence ratiosMin liquidity test (springing); incurrence test on additional debt (2.5× sec. leverage)
Hybrid · reporting covenants
Compliance certificateQuarterly officer's certificateCFO sign-off · all financial-ratio measurements + no-default attestation

Sponsor-backed deals (PE LBOs) lean covenant-light, with incurrence-only tests. Strategic / public-issuer high-yield like Carvana's 2023 PIK exchange tends to be maintenance + incurrence — the lenders demanded the tighter package after the near-restructuring.

Maintenance vs incurrence — the critical distinction

Maintenance: ratio tested every period regardless of borrower action. Miss it → default.

Incurrence: ratio tested only when borrower acts (raises debt, pays dividend, makes acquisition). No action → no test.

Carvana's 2023 PIK notes lean incurrence-heavy — that's why earnings can be weak without triggering default. The discipline is on what they do, not what they are.

Carvana snapshot

CVNA · $63.73MC $69.9B

FY25 revenue $20.3B · Op profit $1.9B · Int. expense $505M · OCF $1.0B · Cash $2.3B