An equity cure is a right written into a credit agreement that lets the owners cure a breach of a financial covenant by contributing new equity within a short window after the quarter's compliance certificate is due. The agreement then treats the cash either as added EBITDA for the quarter that failed or as a paydown of debt, and the covenant is recalculated with it counted in. Lenders limit how often it can be used, forbid back-to-back cures and cap the amount at what the cure needs. Without one, the only way out of a breach is the lender's consent.
- What it cures
- A missed financial maintenance covenant, such as leverage or coverage
- How cash is counted
- As added EBITDA for the tested quarter, or as a reduction of debt
- Usual limits
- A set number over the loan's life, none in consecutive quarters, no more than needed
- Where it is standard
- Private credit and sponsor-backed loans; negotiated case by case with banks
- Why it matters to owners
- It turns a covenant miss into the owner's choice instead of the lender's
How an equity cure works
Financial maintenance covenants are tested at each quarter-end and reported a set number of days later on a compliance certificate. If a test fails, the company is in default from the moment the certificate shows it, unless the agreement gives it a way out. An equity cure is that way out. The owners notify the lender that they intend to cure, contribute cash to the company within the cure window, and the covenant is recalculated with the contribution counted in. If the recalculated number passes, the breach is treated as never having happened.
Most agreements also give the lender a standstill during the cure window: it cannot accelerate the loan or exercise remedies over that covenant while the owners have time left to cure. Some agreements block new borrowings under a revolver during the window, which matters if the business relies on the line for payroll. The equity cure glossary entry gives the short definition; this page covers the mechanics and the negotiation.
EBITDA cure or debt paydown: why the treatment matters
The cure cash can be counted in two ways, and the difference in how much money it takes is large. In an EBITDA cure, the contribution is added to EBITDA for the quarter that failed. In a debt paydown cure, the contribution is treated as having reduced debt. Take a leverage covenant of no more than four times EBITDA, with debt of 10,000 and trailing EBITDA of 2,300, a miss:
| EBITDA cure | Debt paydown cure | |
|---|---|---|
| What the cash does | Added to trailing EBITDA for the failed quarter | Deducted from debt for the failed quarter |
| What the test needs | EBITDA of at least 2,500 against debt of 10,000 | Debt of no more than 9,200 against EBITDA of 2,300 |
| Cash required | 200 | 800 |
| Effect on later quarters | The added amount stays in trailing EBITDA until that quarter rolls out of the twelve-month window | Debt stays lower for good if the cash actually prepays the loan |
| Effect on a coverage test | Raises cash flow available, the side of the ratio that usually needs help | Reduces fixed charges only slightly, so rarely enough on its own |
| Who prefers it | Borrowers: it cures more for less cash | Lenders: the cash reduces their exposure |
The EBITDA cure takes a quarter of the cash in this example, because every unit of added EBITDA is worth four units of debt at a four-times covenant. That leverage is exactly why lenders restrict it. Some agreements allow the EBITDA treatment for the covenant test but still require the cash to prepay the loan, and forbid counting it twice: the cash raises EBITDA, but the debt reduction is ignored for the quarter being cured. A few treat a cure as debt paydown only. Which one the draft says is the first thing to check.
The usual limits
Lenders accept a cure right because it brings in fresh equity when the company needs it. They limit it because an unlimited right would let owners paper over a business in structural decline, one quarter at a time, while the lender's position eroded. The limits in most lower-middle-market agreements look like this:
| Limit | What it means | What to negotiate |
|---|---|---|
| Number of cures | A fixed number over the life of the loan | Enough to cover a genuinely bad year, not just one quarter |
| No consecutive quarters | A cure cannot be used in two quarters in a row | Allow it where the two misses have one cause, if the lender will |
| Rolling window | A limit on cures within any four consecutive quarters | Consistency with the lifetime count |
| Amount | No more than needed to pass the covenant | A modest over-cure, so the next test is not on a knife edge |
| Disregarded elsewhere | Cure amounts do not count for the pricing grid, baskets or permitted acquisitions | Standard; accept it |
| Form of the money | Common equity, or subordinated shareholder loans the lender approves | Allow subordinated owner loans, with terms set in advance |
| Timing | Cash must arrive within a short window after the compliance certificate is due | A window long enough to raise money from outside the business |
| Standstill | No acceleration or remedies during the window | Access to the revolver during the window |
An equity cure is a bridge for a temporary shortfall. If the miss is structural, the cure money buys a quarter and little else, and the conversation to have is a reset or a refinancing.
Why owners without a sponsor should still ask for one
Private equity sponsors negotiate cure rights routinely because they have funds to call and a reason to protect the investment. The assumption that follows is that a cure right is a sponsor's tool. It is not. It is a right to choose, and an owner-operator needs that right more than a sponsor does, for three reasons.
- The guarantee. Owner-operators usually sign a personal guarantee; sponsors usually do not. A default puts the owner's personal assets closer to the table, so the value of avoiding one is higher.
- The alternative is the lender's discretion. Without a cure, a covenant miss leads to a waiver or an amendment the lender prices as it likes: a fee, a higher spread, tighter reporting, sometimes a new guarantee. What to do after a covenant breach lays out those outcomes.
- Owners usually have a source. Personal savings, a partner, a family member or an existing minority investor can often cover a small EBITDA cure. The point is having the contract allow it before it is needed.
It is also cheaper to get at signing than at any other time. A lender competing for a loan will often grant a limited cure right with little pushback; the same lender, facing a borrower that has already missed a test, has no reason to. Asking for one also signals something useful: that the owner has thought about a bad quarter and has a plan for it. Where the lender will not grant a cure right, wider covenant headroom is the substitute, and it is worth pressing harder for.
Before you use one
Using a cure right is a decision to put new money into a business that has just underperformed. Before exercising it, owners should be able to answer three questions: what caused the miss, whether the next test will pass without another cure, and whether the business would be better served by a reset of the covenants or a new lender. A cure that buys one quarter and leads to a second miss uses up the right and the cash.
- Rerun the covenants for the next four test dates on a realistic forecast, not the plan.
- Check how the cure is counted: EBITDA, debt paydown or both, and whether the cash must prepay the loan.
- Confirm the window, the notice required and whether the revolver stays open during it.
- Count the cures remaining under the lifetime and rolling limits.
- Document an owner loan as subordinated on the lender's terms if that is the form the money takes; see how lenders treat owner loans.
If a cure will not hold, the stronger move is usually to go to market while the company can still show a clean history. Refinancing after a down year covers how lenders read a dip. Transparent's lender book holds 1,800+ lenders, and the financing model in the package Transparent builds projects each covenant on each test date, so a borrower can see where the next test lands before deciding whether to cure, reset or refinance.
Common questions
- Does an equity cure count as new EBITDA forever?
- No. It counts for the quarter that failed and stays in trailing twelve-month EBITDA only until that quarter rolls out of the window. It is usually ignored for pricing, baskets and any other purpose besides the covenant it cured.
- Can a shareholder loan be used instead of equity?
- Sometimes. Many agreements accept a loan from the owners only if it is subordinated to the lender on terms the lender approves. If owner loans are the likely source, agree the terms at signing.
- Do banks give equity cure rights?
- Some do, especially on larger loans, but it is less standard than in private credit and usually has to be asked for. Asset-based lines rarely need one because their coverage test usually springs only when availability is low.
- Can I cure a missed payment with an equity cure?
- No. Cure rights apply to financial covenants such as leverage and coverage. A missed payment is a payment default, handled under different provisions.
- What happens if the cure money does not arrive in time?
- The breach becomes an event of default when the window closes, and the lender's remedies under the agreement become available to it.