equity cure

equity cure
United Kingdom
A provision in a facility agreement which permits the shareholders of the borrower to inject additional equity into the borrower to "cure" a financial covenant breach arising because of a shortfall in cash flow or, sometimes, EBITDA.
An equity cure right usually operates so that the relevant financial covenants are retested on a pro forma basis to take into account the additional cash. The precise scope of the equity cure right is often heavily negotiated, in particular how the additional equity is to be treated when retesting the financial covenants. Sometimes, it is agreed that the cash injection can be used to increase cashflow and, if relevant, EBITDA. Alternatively, the lenders may insist that it should be applied to reduce borrowings (either by the borrower prepaying the facilities or by the amount being placed in a blocked account).
Usually, an equity cure right is limited in terms of the number of times it may be exercised and the time frame within which the additional equity must be provided.

Practical Law Dictionary. Glossary of UK, US and international legal terms. . 2010.

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