Covenants
Equity cure
An equity cure lets shareholders inject money to fix a covenant breach after it has happened. It is a limited resource, capped in number and frequency, and how the cash is applied decides how much good it does.
Also called cure right · cure rights · shareholder cure · EBITDA cure
The same £400k cures very differently. Treated as EBITDA it moves the ratio nearly three times as far as prepaying debt.
| Treatment | Resulting leverage |
|---|---|
| Before cure | 3.33x |
| Applied to debt | 3.11x |
| Treated as EBITDA | 2.73x |
Illustrative: £6m net debt, £1.8m EBITDA, £400k injection, 3.0x covenant. Derived arithmetic.
What a cure right is
An equity cure is a contractual right for shareholders to inject money after a covenant test has failed, and to have that money treated as if it fixed the ratio. It converts what would be an event of default into an administrative event, provided the injection lands inside the cure window and inside the caps.
It is worth being precise about what that means. The breach still happened. The cure does not pretend otherwise; it deems the covenant satisfied for that test date. That distinction matters where other provisions, such as a springing test or a restriction on dividends, key off a breach having occurred rather than off an uncured breach.
EBITDA cure against debt-prepayment cure
This is the single most valuable line in the clause and the one borrowers most often overlook. The same money does very different work depending on how the agreement treats it.
A prepayment cure applies the injection to reduce net debt. It moves the numerator only. An EBITDA cure deems the injection to be additional earnings for the test period, which moves the denominator, and because leverage is a ratio the effect is roughly proportionate to the multiple. On a business with £6m of net debt and £1.8m of EBITDA against a 3.0x covenant, a £400k injection applied to debt improves leverage from 3.33x to 3.11x, which is still a breach. The same £400k treated as EBITDA takes it to 2.73x, comfortably inside.
The EBITDA treatment is the one worth asking for. Where a lender insists on prepayment, understand that the cure you have is materially weaker than the one you thought you had, and size the covenant accordingly.
A cure right is bounded in four directions at once. All four matter before it can be relied on.
| Limit | Typical constraint |
|---|---|
| Consecutive quarters | Usually barred |
| Per financial year | Once or twice |
| Over the loan life | Three or four |
| Over-cure | Not permitted |
Market convention at £3-15m. Caps are negotiated deal by deal.
The four caps, and why they exist
Cure rights are bounded in four directions at once, and the drafting is in the fine print rather than the term sheet.
Cures are almost always capped over the life of the loan, commonly at three or four in total. They cannot normally be used in consecutive quarters, which prevents a business from covering a sustained decline one quarter at a time. They are limited to once or twice in any financial year. And an over-cure, meaning an injection beyond the amount needed to fix the shortfall, is usually disallowed, so shareholders cannot use the mechanism to build a cushion for next quarter.
The logic from the lender's side is that a cure is meant to bridge a temporary problem, not to disguise a structural one. A business curing every other quarter is not experiencing volatility; it is over-levered, and the caps force that conversation to happen rather than be papered over.
Where the money comes from
The right sits with shareholders, and in a sponsored deal that means the fund. In an owner-managed business at £3-15m it means the owners writing a cheque, which is a materially different proposition and one worth thinking about before agreeing a structure that depends on it.
The form matters too. Most agreements require new equity or fully subordinated shareholder debt that is non-cash-paying and cannot be repaid ahead of the facility. Money advanced on any other basis will not qualify. Where the injection is structured as shareholder debt, check that it is excluded from the definition of debt for the covenant, since otherwise the cure adds to the numerator it was meant to fix.
There is also a practical timing constraint. The cure window is typically short, often running from delivery of the compliance certificate for a defined number of business days. Shareholders who need to liquidate assets to fund a cure may not be able to move inside it.
A cure is one of five responses to a breach, and rarely the first one to reach for.
| Response | Relative cost |
|---|---|
| Reset agreed early | Cheapest |
| Waiver | Fee plus position |
| Equity cure | Cash plus a right |
| Refinance | Fees plus call protection |
| Enforcement | Rare |
Relative cost to the borrower, not measured data.
What a cure cannot fix
A cure right is usually drafted against the financial covenants, and often against the leverage test specifically. It does not fix a payment default, a misrepresentation, a cross-default or a breach of an information undertaking.
Even within the financial covenants, coverage varies. A cure that deems the injection to be EBITDA will flatter a leverage test and an interest cover test at once, since both use EBITDA. A cure applied to prepay debt does nothing for interest cover in the period of the breach, because the interest was already incurred. Where a facility tests debt service cover against cash, a cure may or may not be counted as cash depending on the drafting.
Which covenants the cure attaches to decides its value. A right that only cures leverage is of limited use in a business whose binding constraint is cover.
When using one is the wrong move
A cure is a limited resource with a small number of uses, and spending one early to cover a problem that is not temporary usually makes the eventual conversation worse rather than better.
The test is honest: does the forecast show the covenant being met at the next test date without a further cure? If it does not, the business is not curing a bad quarter, it is deferring a restructuring by one quarter and burning a right it will want later. In that situation an early approach for a reset, made before the failure, is almost always the better route, and it is the cheapest of the five responses to a breach precisely because it happens before anything has gone wrong on paper.
The exception is where the shortfall is caused by something visibly one-off and already reversed, such as a delayed contract that has since signed. There, a cure does exactly what it was designed to do.
What it is worth at term-sheet stage
A cure right is not free. Lenders price the flexibility, and a borrower asking for four cures with EBITDA treatment and no consecutive-quarter restriction is asking for something with real value.
The trade worth making is between cure rights and headroom. Given a choice, wider headroom is better: it prevents the breach rather than remedying it, it costs nothing to exercise, and it does not depend on shareholders having cash available at short notice. A structure with thin headroom and generous cure rights looks flexible on paper and is fragile in practice, because it relies on someone writing a cheque inside a fifteen-day window during a bad quarter.
Where headroom is already at the 25 to 30% convention, cure rights are a sensible second line. Where headroom is thin, cure rights are not a substitute for fixing it.
Common questions
What is an equity cure?
A contractual right for shareholders to inject money after a financial covenant has been breached, and to have that money treated as fixing the ratio. Provided the injection lands inside the cure window and inside the caps, an event of default becomes an administrative event.
How many times can I use an equity cure?
Cures are almost always capped over the life of the loan, commonly at three or four in total. They usually cannot be used in consecutive quarters, and are limited to once or twice in any financial year. Injecting more than the amount needed to fix the shortfall is generally disallowed, so you cannot over-cure to build a cushion.
Does the cure money reduce debt or count as EBITDA?
It depends on the drafting, and the difference is large. Applied to prepay debt it moves only the numerator. Treated as EBITDA it moves the denominator, and because leverage is a ratio the effect is roughly proportionate to the multiple. On £6m of net debt and £1.8m of EBITDA, a £400k injection applied to debt gives 3.11x while the same money treated as EBITDA gives 2.73x.
Who has to provide the cure money?
The shareholders. In a sponsored deal that means the fund; in an owner-managed business it means the owners writing a cheque at short notice, which is a materially different proposition. Most agreements require new equity or fully subordinated non-cash-paying shareholder debt, and the cure window is often only a defined number of business days.
Can an equity cure fix any covenant breach?
No. Cure rights are drafted against the financial covenants and often against leverage specifically. They do not fix a payment default, a misrepresentation, a cross-default or a breach of an information undertaking. Even within the financial covenants, a debt-prepayment cure does nothing for interest cover in the period of the breach, because the interest was already incurred.
Is an equity cure better than negotiating a covenant reset?
Usually not. A reset agreed before the test fails is the cheapest response to a looming breach, because nothing has gone wrong on paper yet. A cure costs real shareholder cash and consumes one of a small number of rights. The honest test is whether the forecast shows the covenant being met at the next test without a further cure; if it does not, a cure defers the problem rather than solving it.
Should I trade headroom for cure rights?
No, take the headroom. Wider headroom prevents the breach rather than remedying it, costs nothing to exercise, and does not depend on shareholders having cash available inside a short window during a bad quarter. Cure rights are a sensible second line once headroom is already at the 25 to 30% convention, not a substitute for it.
Does a cure remove the breach from the record?
It deems the covenant satisfied for that test date, but the breach still occurred. That matters where other provisions key off a breach having happened rather than off an uncured breach, such as restrictions on dividends or a springing test. Which formulation an agreement uses decides what the cure is worth.
The full treatment sits in the guide: loan covenants explained.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.