How many times can a borrower use an equity cure?

As many times as the agreement allows, and that is negotiated deal by deal. Agreements commonly set two limits together: a total over the life of the loan and a frequency limit, such as no cures on consecutive test dates or no more than a set number in any four quarters. A borrower can be under its lifetime total and still be unable to cure this quarter because it cured the last one. Some agreements also cap each cure at the amount the breach requires.

Is an equity cure added to EBITDA or used to reduce debt?

Whichever the agreement says. Counted as EBITDA, the money is treated as extra earnings in the failed period, which takes far less cash to fix a leverage ratio; counted as debt reduction, it is treated as cash that repays or offsets the loan. Some agreements let the borrower choose. A well-drafted clause also stops the same money being counted both ways, as earnings and as cash netted against debt, in the same test.

Does the equity cure money have to repay the loan?

Only if the agreement requires it. Some agreements send the whole cure amount to prepayment, some part of it, and some leave it with the business to fund its working capital. A lender wants the cure to reduce what it is owed, since that is what the covenant was protecting; an owner wants the cash to stay where the business can use it. Where prepayment of a revolving facility is allowed, the borrower may be able to redraw it.

What happens if the owners do not put the money in?

Once the cure window closes without the money, the breach stands as an event of default, and the lender has the rights the agreement gives it for any financial covenant breach. In practice that usually opens a negotiation about a waiver or a reset rather than enforcement. Agreements differ on the window itself: in some the default exists at once but the lender cannot act until the window closes, in others it arises only then, and some block new revolver drawings meanwhile.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Equity Cure: a Worked Example

The cheque fixes the ratio. It does not fix the quarter.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

An equity cure is the owners buying their way out of a failed financial covenant, and a lender asks how much new money it takes and what that says about the business. Many cure clauses let the owners' contribution be counted as if it were earnings in the period that failed, so a small cheque moves a leverage ratio a long way: at four times, every dollar added to EBITDA does the work of four dollars of debt repaid. That multiplier is why lenders limit how often a cure can be used, and why they read the ratio before the cure as carefully as the one after it.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 04 — Highview Industries. Same request as Issue 01 on the surface. A completely different file underneath. Your call first, then the senior banker's.

Read the file →

// 01 — WHY A FINANCIAL BREACH NEEDS ITS OWN CURE

Most promises in a facility agreement are about conduct, and conduct can be corrected: accounts delivered late can still be delivered. A financial covenant measures a quarter that has already closed, and nothing done after the quarter end changes what the business earned in it. Without words written for the purpose, a failed leverage test stays failed, and the only way out is the lender's waiver.

An equity cure is that special wording. It gives the owners a right, not an obligation, to inject money within a short window after the compliance certificate, and it tells the parties how to recalculate the test as if the money had been there. The right belongs to the borrower: if the conditions are met, the lender cannot refuse it. That is what the owners are paying for when they negotiate it, and what the lender gives up when it agrees. The clause is most at home in sponsor-backed deals. A bilateral facility to an owner-managed business may carry no cure right at all, and the same injection then arrives as part of a waiver negotiation instead.

// 02 — HOW A CURE IS COUNTED

EBITDA cure: EBITDA needed = net debt ÷ covenant level

cure = EBITDA needed − actual EBITDA

Debt cure: debt allowed = covenant level × actual EBITDA

cure = net debt − debt allowed

The document picks one treatment, or lets the borrower choose. Counting the money as EBITDA is cheaper for the owners by a factor equal to the covenant multiple; counting it as debt reduction treats the money as what it is, cash that could repay the lender. In UK and European leveraged deals the debt treatment was historically the usual one; by the late 2010s the EBITDA treatment had become common in the larger sponsor-backed term loans there. Around the formula sit the terms that decide what the cure is worth: how many cures are allowed over the life of the loan and in any run of quarters, whether two may fall on consecutive test dates, whether the amount is capped at what the breach requires, whether the cash must repay the facility, and whether the cure stays in the twelve-month EBITDA for the later tests that include the cured quarter.

// 03 — THE EXAMPLE

A sponsor-backed packaging manufacturer, constructed for this page like every figure in it, has net debt of US$84m and a net leverage covenant of 4.00 times. At the June test its twelve-month EBITDA is US$19m. The covenant level and the cure terms belong to the example, not to any market norm. Its agreement counts a cure as EBITDA, excludes the cure cash from the netting so it is not counted twice, keeps the cure in later twelve-month figures, and bars cures on consecutive test dates.

June, as tested: 84 ÷ 19.0 = 4.42× breach

EBITDA cure: 84 ÷ 4.00 = 21.0 → cure 21.0 − 19.0 = 2.0

Debt cure, for scale: 4.00 × 19.0 = 76.0 → cure 84.0 − 76.0 = 8.0

The sponsor puts in US$2m and June is deemed compliant at exactly 4.00 times. Repaying debt instead would have taken US$8m. Then September arrives. Trading has slipped again: actual twelve-month EBITDA is US$18m and net debt is US$83m. The June cure is still inside the twelve months, so it is counted again.

September, with June cure: 83 ÷ (18.0 + 2.0) = 83 ÷ 20.0 = 4.15× breach

September, underlying: 83 ÷ 18.0 = 4.61×

Cure needed: 83 ÷ 4.00 = 20.75 → 0.75 more

September needs only US$0.75m more, but this agreement does not allow a cure on consecutive test dates, so the breach stands and the conversation the June cheque postponed begins one quarter later. The lender now holds the number it should have been reading all along: 4.61 times on what the business actually earns, up from 4.42 at June.

DEFINED IN ONE PARAGRAPH → · LOAN COVENANTS, EXPLAINED → · DEBT TO EBITDA →

// 04 — THE CLAUSES READ BESIDE IT

A waiver is the lender's decision; a cure is the borrower's right. Under a waiver the lender can set conditions, take a fee and reset the covenant. Under a cure the owners pay and the test is passed, and the lender's leverage in the conversation is what it negotiated into the clause years earlier.

A covenant mulligan reaches a similar place by a different road: the first breach is disregarded and no money goes in. A cure period is the general grace to remedy a breach before it becomes an event of default. A financial covenant breach often gets none, there being nothing to remedy, and the equity cure window works as its cure period. The cure is also distinct from the equity contribution made at the start of a deal, though both are the owners' money at risk below the lender's.

Cure clauses commonly confine the deemed EBITDA to the financial covenant. A margin ratchet, a dividend test or an incurrence test for new debt is then read on the business's actual figures, so a cured borrower does not also earn a lower margin or a new borrowing capacity from the same cheque.

// 05 — WHERE IT DECIDES A FILE

The terms are argued in the term sheet, and each limit the lender wins is a quarter in which it can still use a breach to reopen the deal. After signing, the clause changes how a lender reads a file. A cure is information: the owners have looked at the business and decided it is worth more money, which is a better signal than a sponsor who walks away. But the credit paper reports the ratio before the cure, because that is the business the bank is lending to, and a second or third cure in a short run is the pattern the frequency limits exist to stop. A business that needs repeated cures is not having a bad quarter. It no longer earns its debt, and the cures have bought time to decide what happens next.

COVENANT RESET → · PROBLEM LOANS AND WORKOUT →

// QUESTIONS PEOPLE ASK

How many times can a borrower use an equity cure?: As many times as the agreement allows, and that is negotiated deal by deal. Agreements commonly set two limits together: a total over the life of the loan and a frequency limit, such as no cures on consecutive test dates or no more than a set number in any four quarters. A borrower can be under its lifetime total and still be unable to cure this quarter because it cured the last one. Some agreements also cap each cure at the amount the breach requires.
Is an equity cure added to EBITDA or used to reduce debt?: Whichever the agreement says. Counted as EBITDA, the money is treated as extra earnings in the failed period, which takes far less cash to fix a leverage ratio; counted as debt reduction, it is treated as cash that repays or offsets the loan. Some agreements let the borrower choose. A well-drafted clause also stops the same money being counted both ways, as earnings and as cash netted against debt, in the same test.
Does the equity cure money have to repay the loan?: Only if the agreement requires it. Some agreements send the whole cure amount to prepayment, some part of it, and some leave it with the business to fund its working capital. A lender wants the cure to reduce what it is owed, since that is what the covenant was protecting; an owner wants the cash to stay where the business can use it. Where prepayment of a revolving facility is allowed, the borrower may be able to redraw it.
What happens if the owners do not put the money in?: Once the cure window closes without the money, the breach stands as an event of default, and the lender has the rights the agreement gives it for any financial covenant breach. In practice that usually opens a negotiation about a waiver or a reset rather than enforcement. Agreements differ on the window itself: in some the default exists at once but the lender cannot act until the window closes, in others it arises only then, and some block new revolver drawings meanwhile.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · PROTECTION

A term sheet offers three protections: a negative pledge, a quarterly leverage covenant, and monthly management accounts.

Which is likely to show deterioration first?

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE GLOSSARYIN ONE PARAGRAPHEquity cure What is an equity cure, and how many times can a borrower use one?