sec-debt-covenant

# SEC Debt Covenant Analysis

Analyze debt covenants and credit agreement terms disclosed in SEC filings for public companies using the Octagon MCP server.

## Prerequisites

Ensure Octagon MCP is configured in your AI agent (Cursor, Claude Desktop, Windsurf, etc.). See [references/mcp-setup.md](references/mcp-setup.md) for installation instructions.

## Workflow

### 1. Identify Analysis Parameters

Determine the following before querying:
- **Ticker**: Stock symbol (e.g., AAPL, MSFT, GOOGL)
- **Filing Type** (optional): 10-K, 10-Q, 8-K
- **Focus Area** (optional): Covenants, facilities, maturities

### 2. Execute Query via Octagon MCP

Use the `octagon-agent` tool with a natural language prompt:

```
Analyze debt covenants and credit agreement terms disclosed in <TICKER>'s latest SEC filings.
```

**MCP Call Format:**

```json
{
  "server": "octagon-mcp",
  "toolName": "octagon-agent",
  "arguments": {
    "prompt": "Analyze debt covenants and credit agreement terms disclosed in F's latest SEC filings."
  }
}
```

### 3. Expected Output

The agent returns structured debt analysis including:

**Debt Overview:**
- Total debt excluding subsidiaries: $20.9B
- Short-term debt: $0.8B

**Covenant Information:**
- FCE Credit Agreement covenants
- Financial metric maintenance requirements

**Data Sources**: octagon-financials-agent, octagon-sec-agent, octagon-web-search-agent

### 4. Interpret Results

See [references/interpreting-results.md](references/interpreting-results.md) for guidance on:
- Understanding covenant types
- Assessing covenant cushion
- Evaluating credit facility terms
- Monitoring compliance risk

## Example Queries

**Full Debt Covenant Analysis:**
```
Analyze debt covenants and credit agreement terms disclosed in F's latest SEC filings.
```

**Covenant Compliance:**
```
Is T in compliance with all debt covenants based on latest 10-Q disclosures?
```

**Credit Facility Terms:**
```
Extract revolving credit facility terms and availability from BA's latest 10-K.
```

**Debt Maturity Schedule:**
```
Analyze the debt maturity schedule and near-term obligations for GE.
```

**Leverage Ratios:**
```
What are the maximum leverage ratio covenants in CCL's credit agreements?
```

**Interest Coverage:**
```
Extract interest coverage ratio requirements from NCLH's debt covenants.
```

## Debt Structure Overview

### Types of Debt

| Type | Characteristics |
|------|-----------------|
| Senior Secured | First lien, asset-backed |
| Senior Unsecured | No collateral, higher rate |
| Subordinated | Junior to senior debt |
| Convertible | Can convert to equity |
| Term Loans | Fixed maturity, amortizing |
| Revolving Credit | Drawable, flexible |

### Credit Facilities

| Facility | Purpose |
|----------|---------|
| Revolving Credit | Working capital, liquidity |
| Term Loan A | Bank loan, amortizing |
| Term Loan B | Institutional, bullet |
| Bridge Facility | Short-term, M&A |
| Letter of Credit | Guarantees, obligations |

## Covenant Types

### Financial Covenants

| Covenant | Typical Requirement |
|----------|---------------------|
| Leverage Ratio | Debt/EBITDA ≤ X.Xx |
| Interest Coverage | EBITDA/Interest ≥ X.Xx |
| Fixed Charge | (EBITDA-CapEx)/Fixed Charges ≥ X.Xx |
| Minimum EBITDA | EBITDA ≥ $X million |
| Maximum CapEx | CapEx ≤ $X million |
| Minimum Liquidity | Cash + Availability ≥ $X |

### Incurrence Covenants

| Covenant | Restriction |
|----------|-------------|
| Debt Incurrence | Limits new borrowing |
| Lien Incurrence | Limits secured debt |
| Restricted Payments | Limits dividends, buybacks |
| Asset Sales | Requires reinvestment |
| Affiliate Transactions | Arms-length requirement |

### Maintenance Covenants

| Covenant | Requirement |
|----------|-------------|
| Tested Periodically | Quarterly or annually |
| Must Maintain | Ongoing compliance |
| Cure Rights | Ability to remedy |
| Spring | Only tested when drawn |

## Key Covenant Metrics

### Leverage Metrics

| Metric | Calculation |
|--------|-------------|
| Total Leverage | Total Debt / EBITDA |
| Net Leverage | (Total Debt - Cash) / EBITDA |
| Senior Leverage | Senior Debt / EBITDA |
| Secured Leverage | Secured Debt / EBITDA |

### Coverage Metrics

| Metric | Calculation |
|--------|-------------|
| Interest Coverage | EBITDA / Interest Expense |
| Fixed Charge | (EBITDA - CapEx) / (Interest + Principal) |
| Debt Service | EBITDA / (Interest + Principal) |
| Cash Interest | EBITDA / Cash Interest |

### Liquidity Metrics

| Metric | Calculation |
|--------|-------------|
| Minimum Cash | Cash and equivalents |
| Minimum Liquidity | Cash + Revolver Availability |
| Current Ratio | Current Assets / Current Liabilities |

## Covenant Cushion Analysis

### Cushion Calculation

| Metric | Current | Covenant | Cushion |
|--------|---------|----------|---------|
| Leverage | X.Xx | ≤Y.Yx | Z.Zx |
| Coverage | X.Xx | ≥Y.Yx | Z.Zx |
| Liquidity | $XM | ≥$YM | $ZM |

### Cushion Assessment

| Cushion Level | Assessment |
|---------------|------------|
| >30% | Comfortable |
| 15-30% | Adequate |
| 5-15% | Tight |
| <5% | At risk |

## Credit Agreement Terms

### Key Terms to Extract

| Term | What It Specifies |
|------|-------------------|
| Facility Size | Total commitment |
| Maturity Date | When it expires |
| Interest Rate | Pricing terms |
| Commitment Fee | Unused fee |
| Amortization | Repayment schedule |
| Prepayment | Early repayment terms |

### Pricing Terms

| Component | Description |
|-----------|-------------|
| Base Rate | SOFR, Prime, LIBOR |
| Spread | Margin over base |
| Floor | Minimum rate |
| Grid Pricing | Spread varies with metrics |

## Maturity Schedule Analysis

### Debt Maturity Profile

| Year | Amount | % of Total |
|------|--------|------------|
| 2025 | $XM | Y% |
| 2026 | $XM | Y% |
| 2027 | $XM | Y% |
| 2028+ | $XM | Y% |

### Refinancing Risk

| Factor | High Risk | Low Risk |
|--------|-----------|----------|
| Near-Term Maturities | >25% in 1 year | <10% in 2 years |
| Market Access | Limited | Strong |
| Credit Rating | Downgrade risk | Stable/upgrading |
| Covenant Headroom | Tight | Comfortable |

## Covenant Violation Analysis

### Consequences of Violation

| Consequence | Description |
|-------------|-------------|
| Default | Triggers acceleration |
| Cross-Default | Affects other debt |
| Waiver Required | Lender approval needed |
| Amendment | Terms modification |
| Cure Period | Time to remedy |

### Cure Mechanisms

| Mechanism | How It Works |
|-----------|--------------|
| Equity Cure | Inject equity to improve ratios |
| Asset Sale | Reduce debt |
| Amendment | Modify covenant level |
| Waiver | Temporary relief |

## Red Flags

### Covenant Red Flags

1. **Tight cushion** - <10% headroom
2. **Covenant holiday** - Temporarily suspended
3. **Repeated amendments** - Ongoing issues
4. **Pro forma adjustments** - Aggressive EBITDA add-backs
5. **Springing covenants** - May become tested

### Liquidity Red Flags

1. **High revolver utilization** - >80% drawn
2. **Near-term maturities** - Large amounts due
3. **Limited refinancing options** - Market access concerns
4. **Declining EBITDA** - Coverage deterioration
5. **Downgrade risk** - Rating agency warnings

## Disclosure Locations

### Where to Find Covenants

| Filing | Location |
|--------|----------|
| 10-K/10-Q | Debt footnote |
| 10-K/10-Q | Liquidity discussion in MD&A |
| 8-K | Credit agreement announcement |
| Exhibits | Full credit agreement |
| S-1/424B | Debt description |

### Key Exhibits

| Exhibit | Content |
|---------|---------|
| Credit Agreement | Full terms |
| Indenture | Bond terms |
| Amendment | Modified terms |
| Compliance Certificate | Covenant calculations |

## Analysis Tips

1. **Read the footnotes**: Detailed covenant terms disclosed there.

2. **Check MD&A liquidity**: Management discusses compliance.

3. **Review exhibits**: Full credit agreements filed.

4. **Track amendments**: Changes signal issues or refinancing.

5. **Calculate cushion**: Don't rely solely on management claims.

6. **Monitor ratings**: Agency reports discuss covenants.

## Use Cases

- **Credit analysis**: Evaluate debt risk
- **Distressed investing**: Identify covenant stress
- **Equity research**: Assess financial flexibility
- **Due diligence**: Understand debt structure
- **Refinancing analysis**: Maturity and terms review