Of all the questions a credit agreement is asked after close, one comes back more often than any other and never has a stored answer. How much more debt can this borrower actually incur?
It is asked by the desk when a sponsor floats an add-on. It is asked by risk when the name goes on watch. It is asked by portfolio after every compliance certificate, by legal when a consent request arrives, and by whoever is writing the annual review. Every time, someone opens the agreement and rebuilds the answer from scratch.
Why it is hard to answer
Incurrence capacity is not a number in the document. It is the sum of several baskets, each of which is conditional, and the conditions interact.
- The ratio basket. Unlimited debt if pro forma leverage is at or below a level, which means you need current EBITDA on the agreement's definition, current net debt on the agreement's definition, and the pro forma adjustments the definition permits.
- The general basket. The greater of a fixed amount and a percentage of EBITDA. The fixed amount is on the page; the EBITDA leg moves with every certificate.
- The specific baskets. Capital leases, acquired debt, purchase money, local facilities, each with its own cap and often its own grower.
- The reclassification right. Debt incurred under one basket can later be reclassified to another once capacity exists there, which means the used portion of each basket is a history, not a snapshot.
- The lien and payment overlays. Capacity to incur is not capacity to secure, and neither is capacity to pay it out. The three questions share definitions and diverge in the baskets.
Then there is what has already been used. Every incremental, every add-on, every local facility drawn since close has consumed something, and the record of what it consumed is spread across amendment letters, incurrence notices and the compliance certificates that mention them in passing.
What a stored answer looks like
The answer should be a table, not a paragraph. One row per basket: the cap as the document defines it, the current value of that cap on the latest reported EBITDA, the amount used with the events that used it, the remaining capacity, and the citation for each figure. Above the table, the ratio test with the current pro forma ratio, its threshold and the headroom. Below it, the same structure for liens and for restricted payments.
That table has to be rebuilt every time an input changes: a new certificate re-values every grower, an incurrence notice consumes a basket, an amendment moves a cap. Each rebuild should keep the previous version, so the question "what was the capacity when we approved that add-on" has an answer too.
Capacity is a computed value with a history. It is not a fact you can look up, which is why nobody has been able to store it.
What changes when the answer exists
Two things. The first is speed: the add-on conversation with the sponsor starts from the number rather than from a week of document review, and the desk knows where the room is before the sponsor tells them. The second is more important. Capacity becomes something you can monitor. A borrower whose general basket is nearly consumed and whose ratio test is within half a turn of its threshold has run out of flexibility, and that is a credit signal in its own right, months before anything shows up in the maintenance tests.
We think this is the question a covenant system should be built around, because it is the one the documents were negotiated to answer and the one nobody can answer today without re-reading them. Everything else in the package is either an input to it or a consequence of it.