In one sentence
The cash and readily marketable assets a sponsor holds, tested at underwriting and often required to be maintained as a covenant through the loan term.
The longer version
Liquidity is what lets a sponsor absorb a shortfall without the lender having to act. It is underwritten from personal or corporate financial statements and usually expressed as a dollar floor, sometimes paired with a net worth test, and sometimes as a multiple of annual debt service.
The covenant only means something if it is tested. That requires the statements to arrive on schedule and to be reviewed rather than filed, which is one of the more commonly neglected post-closing obligations and a routine exam finding.
Common questions
- How is sponsor liquidity measured?
- Cash and cash equivalents plus marketable securities, usually excluding retirement accounts and illiquid real estate equity. The precise definition sits in the loan documents.
- What happens if the covenant is breached?
- It is a default under most documents, though lenders commonly negotiate a cure period or take a reserve deposit rather than accelerating.
- How often is it tested?
- Usually annually or quarterly against delivered financial statements, with a compliance certificate from the guarantor confirming the calculation.
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