Equity Cure Rights in Sponsor-Backed ABL Credit Agreements: How They Work and What to Negotiate

An equity cure right is one of the most valuable — and most misunderstood — provisions in a sponsor-backed credit agreement. Used correctly, it converts what would otherwise be a covenant default into a non-event. Used incorrectly, or drafted loosely, it can produce disputes that swallow weeks of management attention at exactly the moment a business can least afford it.

At Don Clarke Enterprises we advise borrowers and their sponsors on how cure mechanics interact with the rest of an asset based lending (ABL) or unitranche package — the borrowing base, the springing financial covenants, intercreditor terms, and management fee subordination. This post walks through how equity cures work, the limits lenders typically impose, and where the real negotiation happens before a term sheet is signed.

What an equity cure right actually does

An equity cure provision permits a private equity sponsor (or, in some agreements, any equity holder) to contribute fresh cash equity to the borrower after the end of a fiscal quarter. That contribution is then deemed to be added to EBITDA for the purpose of testing financial covenants for the quarter just ended — typically a leverage ratio, a fixed charge coverage ratio (FCCR), or both. If the recalculated covenant complies, the breach is cured retroactively and no event of default exists.

The mechanism is dollar-for-dollar against the EBITDA-based covenant: a $5 million cure contribution raises trailing-twelve-month EBITDA by $5 million for covenant math. As the Brownstein Hyatt Farber Schreck middle-market primer explains, the credit isn't actually for operating performance — it's a contractual fiction that buys the company time without forcing a waiver or amendment process.

That is a meaningful structural concession from lenders. It exists because sponsor-backed deals are priced on the assumption that the sponsor has dry powder and an incentive to support the business through cyclical softness. The cure right is the contractual evidence of that assumption.

The standard limits lenders insist on

Equity cures are heavily negotiated, but most middle-market agreements settle into a recognizable range. Donald Clarke, who authored "Asset Based Lending Disciplines" — the first ABL textbook in the field — and trained more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays, has seen these limits evolve over four decades. The current market typically reflects:

Frequency caps

Most middle-market credit agreements limit how often the cure can be exercised. The Colorado Banker Magazine review of sponsor-backed agreements identifies the prevailing pattern: cures permitted in no more than two consecutive quarters, no more than two in any four consecutive quarters, and a lifetime cap of four to five cures over the term of the facility. Cleary Gottlieb's review of European leveraged finance notes a similar pattern in the unitranche market, with four to five maximum cures over the life of the deal.

Cure window

The sponsor must deliver the cure contribution within a tight window — typically 10 to 15 business days after the date the compliance certificate for the breached quarter is required to be delivered. Some agreements extend this to 30 days; tightly drafted agreements give as little as 10 days. The borrower wants the longest window negotiable; the lender wants the shortest because a long window delays the lender's ability to act on a default.

Amount caps

Lenders frequently cap the cure amount at the smaller of (i) the dollar amount required to bring the covenant into compliance and (ii) a percentage of EBITDA — commonly 15% to 25% of pro forma EBITDA. The "no overcure" rule prevents sponsors from injecting a massive equity check that masks a structural deterioration for several future quarters.

Use of proceeds restrictions

Heavily negotiated. Lenders increasingly require that cure proceeds be applied to reduce debt, not just sit on the balance sheet. The Sidley March 2026 update on financial covenants in private credit highlights that direct lenders are tightening the "uses" language to force prepayment of revolver outstandings, which simultaneously deleverages the borrower and restores availability.

What the cure cannot fix

An equity cure is narrow. It cures a financial covenant breach — and only a financial covenant breach. It does not cure:

• A borrowing base shortfall under an ABL revolver — that is an availability problem, not a covenant test
• A breach of an affirmative or negative covenant (reporting failures, unpermitted liens, restricted payments, asset sales outside the basket)
• A representation that becomes incorrect
• A cross-default to a separate facility
• A material adverse change determination by the agent, in agreements where MAC is a stand-alone event of default

This matters because sponsors sometimes assume the cure right is a general-purpose pressure valve. It is not. As we discussed in our ABL Covenant Breach Playbook, most ABL workouts arise from borrowing base or excess availability issues — situations where an equity cure has no application at all and a forbearance or amendment is the only path.

Where the borrower-side negotiation actually happens

By the time a deal closes, the cure mechanics are usually settled. The leverage borrowers have is at the term sheet stage. We help borrowers and sponsors think through several specific points:

Cap on cure as a percentage of EBITDA

Sponsor counsel will push for 25%; lender counsel will push for 10% to 15%. The right answer depends on cyclicality. Businesses with seasonal working capital swings or commodity input exposure should pay closely attention here — the cure has to be large enough to actually fix a realistic quarter of softness.

EBITDA-only or also debt paydown

The most aggressive form of cure permits the contribution to be added to EBITDA and the cash to be retained by the borrower. The most restrictive form requires the cash to immediately prepay debt. A middle path — favored by Bass Berry & Sims in its credit facility considerations note — permits retention of the cash but treats the EBITDA addback as a non-cash item, preserving covenant headroom while not forcing a deleveraging event the borrower may not need.

Pro forma effect on subsequent quarters

Watch the language describing how long the cure amount sticks in the EBITDA calculation. Cleanest drafting treats the cure as added EBITDA for the breach quarter and for the next three quarters' trailing-twelve-month calculation. Lender-favorable drafting limits it to the single quarter, which means the borrower may face the same breach 90 days later without a second cure available.

Source of cure funds

Sponsors prefer flexibility — the right to cure with cash from the fund, from a co-investor, from a separate equity raise, or from a permitted holdco loan converted into equity. Lenders prefer restrictions — common equity contributions only, no preferred, no subordinated debt dressed up as equity. The Haynes Boone negotiating-considerations memo recommends that borrowers preserve flexibility to cure with any equity-equivalent instrument, with notice to the agent, to avoid being trapped if the fund is closed to follow-on capital.

Interaction with management fee subordination

In sponsor-backed deals, sponsor management fees are typically subordinated to the credit facility and blocked during a default or covenant breach. As Mayer Brown's analysis of management fee subordination sets out, the cure right should be drafted so that successful cure restores the borrower's ability to pay accrued management fees — otherwise the sponsor has effectively paid twice (an equity cure plus deferred fees).

How equity cures interact with ABL borrowing base mechanics

Most ABL revolvers do not have maintenance financial covenants in the traditional sense — they have a springing FCCR that tests only when excess availability falls below a threshold. We covered the mechanics in our piece on springing FCCR covenants and ABL excess availability triggers. Because the covenant doesn't run continuously, the cure right operates differently:

• The cure is only relevant once excess availability has dropped below the springing threshold and the FCCR is being tested
• If the borrower can rebuild excess availability above the springing threshold before the test date, the FCCR isn't tested at all and the cure isn't needed
• Some agreements provide that equity contributions count toward excess availability if applied to revolver paydown — a related but distinct concept from EBITDA cure

This is why sponsor-backed ABL deals frequently have two layered protections: an excess availability cure (apply equity proceeds to revolver paydown to rebuild availability) and an EBITDA cure (deemed addback to satisfy springing FCCR). The borrower-side advisor's job is to make sure both mechanics work together rather than overlap or contradict.

Unitranche and direct lender cures

The direct lending market has its own conventions. The Global Legal Insights review of private credit deal structures notes that unitranche agreements often have looser cure mechanics than syndicated bank deals — broader EBITDA addbacks, longer cure windows, and fewer use-of-proceeds restrictions. That looseness has a price: pricing is typically 200 to 400 basis points higher than comparable bank facilities. For sponsors weighing a bank syndication versus a unitranche, the cure terms should be part of the all-in cost comparison, not an afterthought.

What we do at Don Clarke Enterprises

We are an independent advisor and loan placement consultant. We are not a lender, not a broker, and not a financial institution. We do not originate, underwrite, fund, approve, or close loans — final credit and funding decisions are made by the lender. What we do is help borrowers and their sponsors prepare for and navigate the financing process:

• Reviewing term sheets and credit agreement drafts before they are signed, with a particular focus on covenant and cure mechanics
• Modeling how cure caps and frequency limits interact with the borrower's actual cash flow profile
• Introducing borrowers to ABL and unitranche lenders whose appetite matches the deal
• Advising on the borrower's positioning in covenant negotiations
• Providing field examination and underwriting advisory services drawn from Don's four-decade career and the curriculum he built for the world's largest ABL training programs

Don Clarke is a Secured Finance Network (SFNet) Hall of Fame inductee (2021) and Lifetime Achievement Award recipient. His textbook remains the standard training reference at major institutions, and his ongoing work with the Asset Based Lending Consultants network reflects four decades of disciplined, advisor-led credit practice.

A practical checklist before signing

Before signing a sponsor-backed credit agreement, run through this short list with counsel:

1. How many cures are permitted in the life of the deal, and what is the frequency cap?
2. What is the cure amount cap as a percentage of pro forma EBITDA?
3. How long is the cure window after the compliance certificate due date?
4. Must cure proceeds prepay debt, or can they be retained?
5. Does the cure addback persist for trailing-twelve-month calculations, and for how many subsequent quarters?
6. What forms of equity qualify — common only, or also preferred or holdco loans?
7. Does successful cure restore the ability to pay subordinated management fees?
8. How does the cure interact with the borrowing base mechanics if this is an ABL facility?

Most of these are negotiated in a single round of term sheet markup. The cost of getting them right is small. The cost of getting them wrong shows up only at the moment the business is already under stress — which is precisely the moment when negotiating leverage has evaporated.