What is an equity cure right, and what can a CFO raise before the sponsor cures?

What an equity cure right is

An equity cure right is a clause in a credit agreement that lets the borrower's sponsor or other equity holders contribute new cash after a missed financial maintenance covenant, and have that cash counted toward the covenant so the test can be recalculated. If the recalculated ratio passes, the breach is treated as cured and the event of default falls away.

The clause usually sits next to the leverage or fixed charge coverage test in the financial covenants section. It matters most to the portfolio CFO, who builds the covenant model, signs the compliance certificate and is usually the first person to see a shortfall coming. For the sponsor, a cure buys time without reopening the agreement; for lenders, it puts fresh equity beneath their debt instead of a negotiated waiver.

How an equity cure works in practice

Most cures follow the same sequence, although every agreement sets its own deadlines and mechanics.

1. The quarter closes and the covenant model shows the company has failed, or will fail, a maintenance test.
2. The borrower gives notice that it intends to cure, usually by the date the compliance certificate is due.
3. The sponsor contributes cash as common equity, or another form the agreement accepts, within the cure period.
4. The cure amount is added to covenant EBITDA for the tested quarter (some agreements apply it as debt reduction instead), and the ratio is recalculated.
5. The CFO delivers a restated compliance certificate. Many agreements stop lenders from accelerating while the cure period runs, though they may block new revolver draws until the cure is complete.

Lenders limit cures because each one masks weaker earnings. Common limits include a cap on cures in any rolling four-quarter period, a cap over the life of the facility, a ban on curing in consecutive quarters, a cure amount no larger than the shortfall, and a rule that cure cash is ignored for baskets, pricing grids and other tests. The numbers are negotiated deal by deal, so the answer to how many cures you have left sits in your own agreement, not in a market rule of thumb.

Illustrative example

Illustrative (a fictional company, not a SourceX client): an industrial services business has a maximum total net leverage covenant of 4.50x. At quarter-end it carries $90.0 million of net debt against $19.0 million of trailing covenant EBITDA, a ratio of 4.74x. Passing requires $20.0 million of EBITDA, so the shortfall is $1.0 million. The sponsor contributes $1.0 million of equity, the agreement adds it to the tested quarter's EBITDA, and the ratio returns to 4.50x.

Because that quarter stays in the trailing calculation, the added amount often supports the next three tests as well. The CFO's model should show what happens when the cured quarter rolls off.

Equity cure vs waiver, amendment and other options

An equity cure is one of several routes out of a covenant problem, and usually the one that costs the sponsor fresh capital.

What a portfolio CFO can raise before the sponsor writes a check

Use a cure-last sequence: work through the cheaper options first and keep the cure for when they run out.

• Rerun the model against the exact definition of Consolidated EBITDA, including caps on add-backs and pro forma adjustments.
• Confirm which facility the test sits in. A springing covenant on a revolver may be tested only above a usage level, so paying the revolver down can avoid the test.
• Count the cures already used and read the conditions attached to the next one.
• Call the agent bank before the certificate is due; lenders treat early warnings differently from surprises.
• List non-dilutive cash sources: working capital, non-core assets and records the company could license.
• Read what the credit agreement says about licensing or disposing of intellectual property before agreeing to any license.

Before the call, have the covenant model, the cure count and the cash plan in one file so the lender conversation starts from facts.

Where a data license fits, and where it does not

A data license is a one-time payment for licensed operational records. The company keeps ownership of its data, approves scope and price, and nothing is binding until it signs. That makes it non-dilutive cash, but three limits matter to a CFO comparing it with a cure.

Timing. A license moves through qualification, a data inventory, pricing, buyer review and contracting before anything is invoiced, and payment typically arrives within about 60 days of invoicing once the buyer selects the data. That does not fit a cure window measured in business days. It fits rebuilding headroom for later tests.

Covenant treatment. Whether license income counts toward covenant EBITDA depends on how the agreement defines EBITDA and treats non-recurring items; the definitions to check are the treatment of non-recurring income and any caps on add-backs. Revenue timing matters as well. Under ASC 606, whether a license grants a right to use intellectual property as it exists or a right to access it over the license period affects when revenue is recognized, as Deloitte's revenue recognition roadmap explains; FASB clarified that licensing guidance in ASU 2016-10. Ask the company's auditors before you model it.

Consent. Some credit agreements restrict exclusive licenses of intellectual property or treat them as asset dispositions, so check early whether lender consent is needed to license company data.

This is general information, not legal, tax or financial advice. Confirm with your own lender counsel and auditors before acting.

Which portfolio companies are worth a licensing introduction

The companies that fit are US businesses with 50+ full-time employees at peak (contractors excluded), several years of documented operations, records spread across many systems, clear rights to license them and an owner or executive prepared to sponsor the process. Field-heavy businesses such as industrial services and chemical distribution often keep long histories of work orders, technical service notes and quotes. The who qualifies page sets out the full baseline, and the operating partners page explains how the program works on the sponsor side.

If you are the CFO of the company itself, the company can apply directly at sourcex.si/apply. If you oversee several companies from the sponsor side, the network opportunity finder helps you decide which ones to raise first.

Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company, and rewards become payable only after the buyer pays and SourceX receives its fee. Check your employer's and your firm's policies before accepting any referral reward.

Next step

Treat a license as a medium-term liquidity source, not a cure. If a portfolio company fits, register as a partner and make the introduction now, so the data question is answered well before the next covenant test.