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Presenting a live 90-minute webinar with interactive Q&A

Structuring Financial Covenants, EBITDA,

and Events of Default to Maximize Borrower

Protection and Lender Remedies

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, OCTOBER 26, 2017

Daniel J. Bursky, Partner, Fried Frank Harris Shriver & Jacobson, New York

J. Christian Nahr, Partner, Fried Frank Harris Shriver & Jacobson, New York

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FINANCIAL COVENANTS, EBITDA AND EVENTS OF

DEFAULT IN COMMERCIAL LENDING

Structuring Effective Credit Agreement Provisions to

Maximize Borrower Protection and Lender Remedies

Daniel J. Bursky

J. Christian Nahr

October 26, 2017

Outline

6

Key Conceptual Questions

Why have Financial Covenants?

What are Financial Covenants?

Types of loans

Key financial definitions and negotiated terms

Securities laws consideration

Equity cure rights

Annex A – Examples of financial definitions

Key Conceptual Questions

7

Two key conceptual questions help guide the analysis and negotiation of financial

covenants and financial covenant definitions. We will be returning to these

questions throughout the presentation

Why am I

testing this

financial

covenant?

What am I

testing for?

Why have Financial Covenants?

8

Means of measuring financial health of a borrower

Can serve as an early warning trigger that a company is distressed, may not be

able to make future payments of principal and interest or may file for bankruptcy

Gives lenders a seat at the table to participate in discussions prior to

restructuring. May lead to amendment fees or increased margin

Borrowers want flexibility to run business and work through a default without

having to worry about liquidity issues resulting from increased interest expense or

other lender requirements

Without financial covenants, a Borrower that is financially unstable may still not

default if it abides by covenants (doesn’t incur more debt, liens, make

distributions, etc.)


9

Quantitative measurement of a particular financial metric

Examples:

Maximum leverage ratio

Minimum fixed charge coverage ratio

Minimum net worth

Minimum liquidity

Minimum cash flow

Why am I

testing this

financial

covenant?

What am

I testing

for?


10

Cash flow, earnings of company leverage

ratio

Asset base, collateral protection net worth or other balance sheet test

Ability to pay interest / principal / taxes, etc. over next fiscal year fixed charge coverage ratio

Liquidity excess availability test

What to test?


11

What to test?

Leverage

Ratio = _______

[Net] Debt

EBITDA

Net Worth = Assets - Liability

FCCR = _______

EBITDA

Fixed

Charges

Liquidity = Cash + available

revolver capacity

Why am I

testing this

financial

covenant?

What am

I testing

for?


12

How to the various covenants change under the following circumstances? Test

various scenarios, especially if any are a part of borrower’s business plan

Change in interest rate environment?

Disposition or acquisition of a business line?

Change in tax rates?

Additional investment in foreign assets / decreased investment in foreign

assets?

Drop in earnings?

Why am I

testing this

financial

covenant?

What am

I testing

for?


13

Incurrence covenants vs. maintenance covenants

Incurrence covenants govern whether a Borrower is permitted to take a

certain type of permissive action, such as incur debt or pay a dividend. If

the Borrower cannot meet the financial test, they can still comply with the

credit agreement by refraining from taking action

Maintenance covenants are mandatory “check-ins” where the Borrower

must demonstrate compliance with the covenant on a regular basis,

regardless of whether it is taking any other action

Generally tested quarterly, but sometimes monthly or more frequently

(particularly in a workout situation)


14

Failure to abide by financial covenants can result in:

Event of default

Allows lenders to accelerate loans

Allows lenders to refuse to fund revolver

May trigger cross-default under other material agreements

Types of loans

15

The nature of financial covenants in a particular deal vary widely depending on

the type of financing

Investment Grade

• No Maintenance covenants, or set at wide level

• No or limited incurrence covenants

• Limited addbacks

Asset Based Loans

• Fixed Charge Coverage Ratio (typically 1.00:1.00) maintenance test

• Excess Availability governor for incurrence tests

Cash Flow Loans

• Maintenance financial covenant

• Balanced add backs

Cov-lite

Sponsor-backed

• Aggressive definitions

• Broad flexibility for borrower

• No maintenance financial covenant (term)

• Springing covenant for revolver

Types of loans – cov-lite

16

No maintenance covenant for term loan. Term loan

limited to incurrence-based covenants.

“Springing” revolver covenant (i.e., only triggered if revolver is more than 35% drawn; inclusion of LCs is

negotiated).

Covenant cushion set at 30-35% cushion to Borrower

model.

Most common in syndicated transactions and customary

for Sponsor deals.

Cov-lite – a $300+ billion

market

Types of loans – cov-lite

17

How do cov-lite loans fare compared to traditional loans?

Research published by Moody’s in 2011 indicated that cov-lite loans did not have significantly higher

rates of default or significantly lower recoveries than traditional loans for similarly situated borrowers in

the downturn.

But pre-downturn, a much smaller number of deals were cov-lite. So there may have been a selection

bias where better credits, or better management, were able to syndicate a cov-lite deal.

In a recent paper, Moody’s expressed the view that the proliferation of cov-lite loans will lead to

significantly higher rates of default or significantly lower recoveries in a down cycle.

Only time will tell!

Why am I

testing this

financial

covenant?

Types of loans – bonds and leveraged loans

18

Convergence of bond and leveraged loan markets Traditionally, term loans were owned by banks and high yield bonds were owned by a much broader

set of investors

In the last ~20 years, the markets for high yield bonds and leveraged loans have converged. This is

driven by a number of factors

First, traditionally term loans were held by banks. But with the proliferation of institutional

investors, including CLOs, the syndicated term loan B market has grown by leaps and bounds

Concurrently, the high yield market continues to be dominated by institutional investors that are

QIBS, with less and less demand from retail clients (144A-for-life deals)

Thus, many of the same institutional investors, or institutional investors with similar profiles,

buy both high yield bonds and leveraged loans. H.Y. bonds and leveraged loans are of

course different products, but there is substantial overlap on the buyside.

In addition, financial sponsors continue to seek to synchronize their loan and bond agreements

Types of loans – bonds and leveraged loans

19

Convergence of bond and leveraged loan markets

The convergence of the high yield bond and leveraged loan market explains many of the changes that

have been borne out in the market place, including:

High yield bonds do not have a financial maintenance covenant growth of cov-lite term loans

High yield bonds allow for Ratio Debt on the basis of 2x Fixed Charge Coverage Ratio test

use a 2x Fixed Charge Coverage Ratio test, and not a closing date Total Net Leverage Ratio

test to govern leveraged loans

High yield bonds allow for Restricted Payments based on 50% Consolidated Net Income builder

allow for an “Available Amount” or “Cumulative Credit” in leveraged loans

Why am I

testing this

financial

covenant?

What am

I testing

for?


20

CNI, EBITDA, Fixed Charges, Excess Cash Flow and other terms all start with GAAP

Common mistake is to jump to definitions and pages in a credit agreement or indenture. The first

layer of analysis is understanding GAAP treatment

Frozen GAAP v. Floating GAAP. Beware of changes in GAAP over time (i.e., lease accounting

standards)


21

Consolidated Net Income

Starts with GAAP - net income (or loss) of the Borrower and its Restricted Subsidiaries, determined

on a consolidated basis in accordance with GAAP.

Tie in to financials – test covenants at Borrower level or Holding company level?

Make a number of adjustments to GAAP

Unusual or non-recurring gains or losses net of taxes,

Historically, this CNI exclusion also included “extraordinary” items. Extraordinary was a

GAAP term, which provided clarity to issuers as to whether a particular item could be

excluded, but it was also very narrow. In contrast, “non-recurring” and “unusual” are not

GAAP terms and can be interpreted more broadly, but there are situations where “non-

recurring” exclusions seem to occur year after year, which could lead to some interpretive

questions. Recently the GAAP rules were changed to eliminate “extraordinary” and some

deals delete extraordinary or replace it with a another term such as “infrequent”.

The portion of net income allocable to minority interests to the extent cash dividends are not

actually received by the Company from such minority interest


22


CNI adjustments to GAAP (con’t)

Exclude the results of subsidiaries that have been designated as “unrestricted subsidiaries”

Gains or losses in respect of asset dispositions not in the ordinary course,

Gains or losses from discontinued operations,

Effects of adjustments due to purchase accounting,

Effects of foreign currency translation and transaction expenses,

Why am I

testing this

financial

covenant?

What am

I testing

for?


23



Net income of a Restricted Subsidiary to the extent that the declaration of dividends by such

subsidiary is not permitted due to its charter or any agreement or law,

This may preclude the inclusion of income at certain foreign subsidiaries which are often

subject to statutory dividend blockages.

Foreign subsidiary credit agreements may also contain dividend restrictions. A

compromise position is to exclude the foreign subsidiary net income from consolidated net

income for purposes of calculating the Restricted Payment basket, but include it for

calculating EBITDA pursuant to the Fixed Charge Coverage Ratio.

Non-cash compensation expense,

Non-cash interest expense to the extent no cash payment is due prior to maturity of instrument,

Writedown of assets from non-cash impairment charges (e.g., goodwill impairment),


24



Net gains resulting from the acquisition of securities,

Any gain or loss resulting from termination of an employee pension benefit plan,

The cumulative effect of a change in accounting principles, and

Fees and expenses relating to certain transactions (acquisitions, investments, dispositions,

repayment of debt, etc.).


EBITDA

EBITDA starts with Consolidated Net Income and, without duplication of CNI exclusions, adds back:

Interest

Taxes

Depreciation

Amortization

EBITDAR = EBITDA, adjusted for rent expense

Goal: EBITDA is a measure of core operating performance. Accordingly, effects of capital structure (i.e.,

size of interest payments), tax attributes and one-time items are excluded.

EBITDA is NOT a measure of free cash flow

25

Why am I

testing this

financial

covenant?

What am

I testing

for?


EBITDA

In addition, EBITDA is often further adjusted for:

The full “run rate” amount of cost savings, operating expense reductions and cost synergies (not

revenue synergies) for the LTM period, in each case resulting from actions with respect to which

substantial steps have been taken or reasonably expected to be taken with [24] months.

Some facilities may reduce the 24 months to 18 months.

Cost savings add-back may be subject to a percentage of EBITDA (20-25%).

Sometimes these are “flex” items in committed deals.

Not required to actually achieve such savings.

Revenue synergies typically not included.

Only substantial steps need to be taken, process does not need to be completed.

26

Why am I

testing this

financial

covenant?

What am

I testing

for?


EBITDA

EBITDA adjustments (con’t)

Write-offs, write-downs or other non-cash charges,

Restructuring charges,

Business optimization expenses,

Minority interest expense, and

Management, monitoring, consulting and advisory fees and related expenses to the Sponsor and the

amount of any directors’ fees or reimbursements.

27


28

Consolidated Fixed Charges

Fixed charges can include:

• Consolidated Interest Expense

• Scheduled principal payments (ABL)

• Cash taxes (ABL)

• Payment of management fee to Sponsor (ABL)

• Certain dividends and distributions (particularly if mandatory dividends) (ABL)

• Payments on Capitalized Lease Obligations (ABL)

In an ABL Fixed Charge Coverage Ratio test, EBITDA is reduced by unfinanced Cap Ex

Borrowers/lenders may negotiate for including an adjustment as a deduct to EBITDA vs. fixed

charge

29


Excess Cash Flow

A percentage of Borrower’s excess cash flow must be applied to pay down Term B Loans. Not

applicable in bonds or most Term A Loans

Typically 50% of ECF must be swept, with step-downs to 25% and 0% at 0.5x and 1.0x below closing

date levels

EBITDA and CNI are both (adjusted) income statement numbers. ECF is an (adjusted) cash flow

number

Cash from (used in) operating activities

Cash from (used in) investing activities

Cash from (used in) financing activities

Borrowers want to structure the ECF definition to make sure that every non-cash addback to EBITDA /

exclusion from CNI is deducted from ECF

Borrowers want to deduct as many cash uses as possible. If the so-called “available amount” or

“builder basket” is based on retained ECF, a more balanced approach may be called for. Lenders will

reply that use of cash may be OK but should come from Borrower’s share of retained ECF and not

reduce Lender’s ECF payment (i.e. certain restricted payments)

30


Excess Cash Flow

Some key deductions (subject to certain exceptions, i.e., other than if financed with long-term debt)

Working cap adjustments (increases ECF if working cap is positive)

Cap ex

Repayments of long-term debt

Permitted Acquisitions and investments

Certain restricted payments

Contractually committed amounts required to be applied within X days after year end to cap ex

or permitted acquisitions

$-for-$ reduction for voluntary repayments of first lien term loans (in some recent deals, other items

also included in $-for-$ deduct)

Calculation of ECF on partial year can get tricky

31


Pro Forma Basis

Financial definitions generally calculated on Pro Forma Basis to give full effect to:

Dispositions

Acquisitions

Incurrence of Indebtedness

Extinguishment of Indebtedness

Designation of subsidiary as restricted / unrestricted


32

Use of Non-GAAP Financial Measures

Regulation G and Item 10 of Regulation S-K regulate disclosure of non-GAAP financial measures.

This includes disclosure of CNI, EBITDA, etc.

The SEC is very focused on this and has recently released additional guidance. Public companies

should make sure securities counsel is looped into presentations that are distributed to lenders that

report these numbers.

Generally speaking, Regulation G and Item 10 of Regulation S-K require:

Present the most directly comparable GAAP financial measure.

GAAP measure should be given prominence.

Provide a reconciliation from the most directly comparable GAAP metric to the non-GAAP

metric


33

SEC Pro Forma Rules

Regulation S-X contains pro forma rules.

These pro forma rules are not necessarily identical to the pro forma rules that govern a credit

agreement or indenture, although some credit agreements and indentures only allow pro forma

adjustments that are compliant with Reg S-X.

Generally speaking, Reg S-X (Pro forma adjustments) includes adjustments which give effect to

events that are:

Directly attributable to the transaction

Expected to have a continuing impact on the registrant, and

Factually supportable

34

Equity cure rights

Borrower defaulted….now what?

Equity cure rights allow equity owners of Borrower to inject equity capital into the Borrower. The

equity is considered additive to EBITDA and “cures” the financial covenant default.

In some middle market deals, EBITDA reduces indebtedness. This loses the multiplier effect.

Equity cure rights often may be exercised for a period of time AFTER quarter end and AFTER

financials required to be reported

Rationale: if equity investor is willing to put in more $$, then there is still equity value left and lenders

will be made whole.

Limited to 4/5 times over the life of loan / no more than 2 cures in any 4 quarter period

EBITDA gross-up limited to amount needed to cure default

EBITDA gross-up only applies to maintenance tests and not to incurrence tests

No revolver draws during period prior to funding the equity cure

35

Daniel Bursky

Co-Head of Capital Markets

T: +1.212.859.8428

F: +1.212.859.4000

[email protected]

J. Christian Nahr

Head of Leveraged Finance

T: +1.212.859.8264

F: +1.212.859.4000

[email protected]

Today’s presenters

36

No. KEY FINANCIAL DEFINITIONS REFERENCED DEAL

1. Consolidated EBITDA Jeld-Wen Term Loan

2. Consolidated EBITDAR Coach

3. Consolidated Net Income Coach

Jeld-Wen Term Loan

4. Fixed Charges Jeld-Wen Term Loan

Jeld-Wen ABL

5. Excess Cash Flow Jeld-Wen Term Loan

6. Pro Forma Basis Jeld-Wen ABL

ANNEX A

37

1. Consolidated EBITDA

“Consolidated EBITDA”: with respect to the Company Borrower and its Restricted

Subsidiaries for any period, the Consolidated Net Income of the Company Borrower and its

Restricted Subsidiaries for such period:

(1) increased (without duplication) by:

(a) provision for taxes based on income or profits or capital, including state, franchise

and similar taxes and foreign withholding taxes of such Person paid or accrued

during such period deducted (and not added back) in computing Consolidated Net

Income, including an amount equal to the amount of tax distributions actually made

to the holders of Capital Stock of such Person or any direct or indirect parent of

such Person in respect of such period in accordance with Section 6.2(b)(xii) which

shall be included as though such amounts had been paid as income taxes directly

by such Person; plus

ANNEX A

38

(b) consolidated Fixed Charges of such Person for such period (including (x) bank fees

and (y) costs of surety bonds in connection with financing activities, in each case, to the

extent included in Fixed Charges), together with items excluded from the definition of

“Consolidated Interest Expense” pursuant to clauses (1)(t) through (1)(y) thereof, in

each case, to the extent the same was deducted (and not added back) in calculating

such Consolidated Net Income; plus

(c) Consolidated Non-Cash Charges of such Person for such period to the extent such

non-cash charges were deducted (and not added back) in computing Consolidated Net

Income; plus

(d) any expenses (including legal and professional expenses) or charges (other than

depreciation or amortization expense) related to any Equity Offering, Permitted

Investment, acquisition, disposition, recapitalization or the Incurrence of Indebtedness

permitted to be Incurred by this Agreement, including a refinancing thereof, and any

amendment or modification to the terms of any such transaction (in each case, whether

or not successful), including such fees, costs, expenses or charges related to the

Transactions, in each case, deducted (and not added back) in computing Consolidated

Net Income; plus

ANNEX A

39

(e) the amount of any cash restructuring costs, charges and expenses included in such

period in computing Consolidated Net Income, including any one-time costs incurred in

connection with acquisitions after the Closing Date and costs related to the closure and/or

consolidation of facilities; plus

(f) any other non-cash charges, including any write offs or write downs, reducing

Consolidated Net Income for such period (provided that if any such non-cash charges

represent an accrual or reserve for potential cash items in any future period, the cash

payment in respect thereof in such future period shall be subtracted from Consolidated

EBITDA to such extent, and excluding amortization of a prepaid cash item that was paid in a

prior period); plus

(g) the amount of any minority interest expense consisting of Subsidiary income attributable

to minority equity interests of third parties in any non-Wholly Owned Subsidiary of the

Company Borrower deducted (and not added back) in such period in calculating

Consolidated Net Income; plus

ANNEX A

40

(h) the amount of management, monitoring, consulting and advisory fees (including

termination fees) and related expenses paid or accrued in such period to the Permitted

Investors to the extent otherwise permitted under Section 6.5 to the extent deducted (and not

added back) in computing Consolidated Net Income; plus

(i) the amount of cost savings, operating expense reductions, restructuring charges and

expenses and synergies that are expected to be realized as a result of actions taken or

expected to be taken within 24 months after the date of any acquisition, divestiture or

disposition, restructuring or the implementation of an initiative, as applicable (calculated on a

pro forma basis as though such cost savings, operating expense reductions, restructuring

charges and expenses and synergies had been realized on the first day of such period as if

such cost savings, operating expense reductions, restructuring charges and expenses and

synergies were realized during the entirety of such period), net of the amount of actual

benefits realized during such period from such actions; provided that

(A) such actions are to be taken within 24 months after the consummation of the

acquisition, divestiture or disposition, restructuring or the implementation of an initiative,

as applicable, which is expected to result in cost savings, operating expense

reductions, restructuring charges and expenses or synergies,

ANNEX A

41

(B) no cost savings, operating expense reductions, restructuring charges and expenses

or synergies shall be added pursuant to this defined term to the extent duplicative of any

expenses or charges otherwise added to Consolidated EBITDA, whether through a pro

forma adjustment or otherwise, for such period and

(C) the aggregate amount of cost savings, operating expense reductions, restructuring

charges and expenses and synergies added pursuant to this clause (i) in any period of

four consecutive fiscal quarters shall not exceed 20.0% of Consolidated EBITDA (after

giving effect to this clause (i)) in the aggregate for any period of four consecutive fiscal

quarters (which adjustments may be incremental to pro forma adjustments made

pursuant to the second paragraph of the definition of “Fixed Charge Coverage Ratio”);

plus

(j) any costs or expenses incurred by the Company Borrower or a Restricted Subsidiary thereof

or any direct or indirect parent thereof pursuant to any management equity plan or stock option

plan or any other management or employee benefit plan or agreement or any stock

subscription or shareholder agreement, to the extent that such costs or expenses are funded

with cash proceeds contributed to the capital of the Company Borrower or net cash proceeds

ANNEX A

42

of an issuance of Equity Interest of the Company Borrower (other than Disqualified Stock)

solely to the extent that such net cash proceeds are excluded from the calculation set forth in

Section 6.2(a)(3), to the extent deducted (and not added back) in computing Consolidated

Net Income; plus

(k) the tax effect of any items excluded from the calculation of Consolidated Net Income

pursuant to clauses (1), (3), (4) and (8) of the definition thereof; plus

(l) earn-out obligations incurred in connection with any Permitted Acquisition or other

Investment permitted hereunder and paid or accrued during such period; plus

(m) reset costs in connection with operations in new locations; plus

(n) price increases, including in respect of raw materials used by the Company Borrower and

its Subsidiaries so long as any such price increase has been effective for at least 90 days

prior to the date of determination (calculated on a pro forma basis as though such price

increases had been realized on the first day of such period as if such price increases were

realized during the entirety of such period);

ANNEX A

43

provided that the aggregate amount of price increases added pursuant to this clause (n) in any

period of four consecutive fiscal quarters shall not exceed 15.0% of Consolidated EBITDA (after

giving effect to this clause (n)) in the aggregate for any period of four consecutive fiscal quarters

(which adjustments may be incremental to pro forma adjustments made pursuant to the second

paragraph of the definition of “Fixed Charge Coverage Ratio”);

(2) decreased by (without duplication) non-cash gains increasing Consolidated Net Income of such

Person for such period, excluding any non-cash gains to the extent they represent the reversal of an

accrual or reserve for a potential cash item that reduced Consolidated EBITDA in any prior period; and

(3) increased (by losses) or decreased (by gains) by (without duplication) the application of FASB

Interpretation No. 45 (Guarantees).

[Term Loan Credit Agreement among JELD-WEN Holding, inc., JELD-WEN, inc., Onex BP Finance

LP, several lenders from time to time parties thereto, and Bank of America, N.A., as Administrative

Agent]

ANNEX A

44

2. Consolidated EBITDAR

“Consolidated EBITDAR” means, for any period,

Consolidated Net Income for such period plus,

without duplication and to the extent reflected as a charge in the statement of such Consolidated

Net Income for such period, the sum of

(a) income tax expense,

(b) interest expense, amortization or writeoff of debt discount and debt issuance costs

and commissions, discounts and other fees and charges associated with Indebtedness

(including the Loans),

(c) depreciation and amortization expense,

(d) amortization of intangibles (including, but not limited to, goodwill) and organization

costs,

ANNEX A

45

(e)(i) any extraordinary or non-recurring costs, expenses or losses paid in cash during

such period in an aggregate amount not to exceed $100,000,000 during the term of this

Agreement and

(ii) any extraordinary or non-recurring non-cash expenses or losses (including any

noncash impairment of assets, and, whether or not otherwise includable as a separate

item in the statement of such Consolidated Net Income for such period, non-cash losses

on sales of assets outside of the ordinary course of business and including non-cash

charges arising from the application of Statement of Financial Accounting Standards No.

142 (or the corresponding Accounting Standards Codification Topic, as applicable)),

(f) non-cash expenses related to stock based compensation and

(g) Consolidated Lease Expense and minus,

ANNEX A

46

(x) to the extent included in the statement of such Consolidated Net Income for such

period, the sum of

(i) interest income,

(ii) any extraordinary or non-recurring non-cash income or gains (including, whether or

not otherwise includable as a separate item in the statement of such Consolidated Net

Income for such period, gains on the sales of assets outside of the ordinary course of

business) and

(iii) income tax credits (to the extent not netted from income tax expense) and

(y) any cash payments made during such period in respect of items described in clauses

(e) and (f) above subsequent to the fiscal quarter in which the relevant noncash

expenses or losses were reflected as a charge in the statement of Consolidated Net

Income, all as determined on a consolidated basis in accordance with GAAP.

[Credit Agreement, dated May 30, 2017 among COACH, INC. the foreign subsidiary

borrowers party thereto, the lenders party thereto, BANK OF AMERICA, N.A. as

Administrative Agent]

ANNEX A

47

3. Consolidated Net Income

Simple Definition:

“Consolidated Net Income” means for any period,

the consolidated net income (or loss) of the Company and its Subsidiaries, determined on a consolidated

basis in accordance with GAAP; provided that there shall be excluded

(a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the

Company or is merged into or consolidated with the Company or any of its Subsidiaries,

(b) the income (or deficit) of any Person (other than a Subsidiary of the Company) in which the

Company or any of its Subsidiaries has an ownership interest, except to the extent that any

such income is actually received by the Company or such Subsidiary in the form of dividends or

similar distributions and

(c) the undistributed earnings of any Subsidiary of the Company to the extent that the declaration

or payment of dividends or similar distributions by such Subsidiary is not at the time permitted

by the terms of any contractual obligation (other than under any Loan Document) or

Requirement of Law applicable to such Subsidiary.

[Credit Agreement, dated May 30, 2017 among COACH, INC. the foreign subsidiary borrowers party thereto,

the lenders party thereto, BANK OF AMERICA, N.A. as Administrative Agent]

ANNEX A

48

Complex Definition:

“Consolidated Net Income”: with respect to the Company Borrower and its Restricted Subsidiaries

for any period, the aggregate of the Net Income of the Company Borrower and its Restricted

Subsidiaries for such period, on a consolidated basis, and otherwise determined in accordance with

GAAP; provided, however, that, without duplication:

(1) any after-tax effect of extraordinary, non-recurring, non-operating or unusual gains, losses,

income or expenses (including all fees and expenses relating thereto) (including costs and

expenses relating to the Transactions), severance, relocation costs, consolidation and

closing costs, integration and facilities opening costs, business optimization costs,

transition costs, restructuring costs, signing, retention or completion bonuses and

curtailments or modifications to pension and post-retirement employee benefit plans shall

be excluded,

(2) the cumulative effect of a change in accounting principles and changes as a result of the

adoption or modification of accounting policies during such period, whether effected

through a cumulative effect adjustment or a retroactive application in each case in

accordance with GAAP, shall be excluded,

ANNEX A

49

(3) any net after-tax effect of income or loss from disposed, abandoned or discontinued

operations and any net after-tax gains or losses on disposal of disposed, abandoned,

transferred, closed or discontinued operations shall be excluded,

(4) any net after-tax effect of gains or losses (including all fees and expenses relating thereto)

attributable to business dispositions or asset dispositions or the sale or other disposition of

any Capital Stock of any Person other than in the ordinary course of business, as

determined in good faith by the Company Borrower, shall be excluded,

(5) the Net Income for such period of any Person that is not a Subsidiary, or is an Unrestricted

Subsidiary, or that is accounted for by the equity method of accounting (other than a

Guarantor), shall be excluded; provided that the Consolidated Net Income of the Company

Borrower shall be increased by the amount of dividends or distributions or other payments

that are actually paid in cash (or to the extent converted into cash) to the referent Person or

a Restricted Subsidiary thereof in respect of such period,

ANNEX A

50

(6) solely for the purpose of the definition of Excess Cash Flow and determining the amount

available for Restricted Payments under Section 6.2(a)(3)(A), the Net Income for such

period of any Restricted Subsidiary of the Company Borrower (other than any Guarantor)

shall be excluded to the extent that the declaration or payment of dividends or similar

distributions by such Restricted Subsidiary of its Net Income is not at the date of

determination permitted without any prior governmental approval (which has not been

obtained) or, directly or indirectly, by the operation of the terms of its charter or any

agreement, instrument, judgment, decree, order, statute, rule, or governmental regulation

applicable to that Restricted Subsidiary or its stockholders, unless such restriction with

respect to the payment of dividends or similar distributions has been legally waived,

provided that Consolidated Net Income of the Company Borrower will be increased by the

amount of dividends or other distributions or other payments actually paid in cash or Cash

Equivalents (or to the extent converted into cash or Cash Equivalents) to the Company

Borrower or any Restricted Subsidiary thereof in respect of such period, to the extent not

already included therein,

(7) effects of adjustments (including the effects of such adjustments pushed down to the

Company Borrower and its Restricted Subsidiaries) in such Person’s consolidated financial

statements pursuant to GAAP and related authoritative pronouncements resulting from the

application of purchase accounting in relation to any consummated acquisition or the

amortization or write-off of any amounts thereof, net of taxes, shall be excluded,

ANNEX A

51

(8) any net after-tax income (loss) from the early extinguishment of (i) Indebtedness, (ii)

Hedging Obligations or (iii) other derivative instruments shall be excluded,

(9) any impairment charge or expense or asset write-off or write-down, including impairment

charges or asset write-offs or write-downs related to intangible assets, long-lived assets or

investments in debt and equity securities or as a result of a change in law or regulations, in

each case, pursuant to GAAP and the amortization of intangibles arising pursuant to GAAP

shall be excluded,

(10) any non-cash compensation charge or expense, including any such charge arising from

grants of stock appreciation or similar rights, stock options, restricted stock or other rights,

and any cash charges associated with the rollover, acceleration or payout of Equity

Interests by management of the Company Borrower or any of its direct or indirect parent

companies, including any expense resulting from the application of Statement of Financial

Accounting Standards No. 123R shall be excluded, provided that any subsequent

settlement in cash shall reduce Consolidated Net Income for the period in which such

payment occurs,

ANNEX A

52

(11) any fees and expenses incurred during such period, or any amortization thereof for such

period, in connection with any acquisition, Investment, Asset Sale, issuance or repayment

of Indebtedness, Equity Offering, refinancing transaction or amendment or modification of

any debt instrument (in each case, including any such transactions consummated prior to

the Closing Date and any such transaction undertaken but not completed) and any charges

or non-recurring merger costs incurred during such period as a result of any such

transaction shall be excluded,

(12) accruals and reserves that are established and not reversed within twelve months after

the Closing Date that are so required to be established as a result of the Transactions (or

within 12 months after the closing of any acquisition that are so required to be established

as a result of such acquisition) in accordance with GAAP shall be excluded,

(13) an amount equal to the amount of tax distributions actually made to holders of Capital

Stock of such Person or any parent company of such Person in respect of such period in

accordance with Section 6.2(b)(xii) shall be excluded as though such amounts had been

paid as income taxes directly by such Person for such period,

ANNEX A

53

(14) any charges resulting from the application of Accounting Standards Codification Topic 805

“Business Combinations,” Accounting Standards Codification Topic 350 “Intangibles—

Goodwill and Other,” Accounting Standards Codification Topic 360-10-35-15 “Impairment or

Disposal of Long-Lived Assets,” Accounting Standards Codification Topic 480-10-25-4

“Distinguishing Liabilities from Equity—Overall—Recognition” or Accounting Standards

Codification Topic 820 “Fair Value Measurements and Disclosures” shall be excluded,

(15) non-cash interest expense resulting from the application of Accounting Standards

Codification Topic 470-20 “Debt—Debt with Conversion Options—Recognition” shall be

excluded,

(16) the following items shall be excluded:

(a) any net unrealized gain or loss (after any offset) resulting in such period from Hedging

Obligations and the application of Accounting Standards Codification Topic 815

“Derivatives and Hedging”; and

(b) any net unrealized gain or loss (after any offset) resulting in such period from

currency translation gains or losses related to currency re-measurements of

Indebtedness (including any net loss or gain resulting from hedge agreements for

currency exchange risk).

ANNEX A

54

Solely for purposes of calculating Consolidated EBITDA, the Net Income of the Company

Borrower and its Restricted Subsidiaries shall be calculated without deducting the income

attributable to the minority equity interests of third parties in any non-Wholly Owned

Restricted Subsidiary of the Company Borrower except to the extent of dividends declared

or paid in respect of such period or any prior period on the shares of Capital Stock of such

Restricted Subsidiary held by such third parties.

In addition, to the extent not already accounted for in the Consolidated Net Income of

such Person and its Restricted Subsidiaries, notwithstanding anything to the contrary in the

foregoing, Consolidated Net Income shall include (i) the amount of proceeds received

during such period from business interruption insurance in respect of insured claims for

such period, (ii) the amount of proceeds as to which the Company Borrower has

determined there is reasonable evidence it will be reimbursed by the insurer in respect of

such period from business interruption insurance (with a deduction for any amount so

added back to the extent denied by the applicable carrier in writing within 180 days or not

so reimbursed within 365 days) and (iii) reimbursements of any expenses and charges that

are covered by indemnification or other reimbursement provisions in connection with any

Permitted Investment or any sale, conveyance, transfer or other disposition of assets

permitted hereunder.

ANNEX A

55

Notwithstanding the foregoing, (x) for the purpose of Section 6.2 only (other than clauses

(a)(3)(E) and (a)(3)(F) therein), there shall be excluded from Consolidated Net Income any

income arising from any sale or other disposition of Restricted Investments made by the

Company Borrower and its Restricted Subsidiaries, any repurchases and redemptions of

Restricted Investments from the Company Borrower and its Restricted Subsidiaries, any

repayments of loans and advances which constitute Restricted Investments by the

Company Borrower or any of its Restricted Subsidiaries, any sale of the stock of an

Unrestricted Subsidiary or any distribution or dividend from an Unrestricted Subsidiary, in

each case only to the extent such amounts increase the amount of Restricted Payments

permitted under such covenant pursuant to clauses (a)(3)(E) and (a)(3)(F) therein and (y)

for the purpose of the definition of Excess Cash Flow only, there shall be excluded the

income (or deficit) of any Person accrued prior to the date it becomes a Restricted

Subsidiary of the Company Borrower or is merged into or consolidated with the Company

Borrower or any Restricted Subsidiary thereof.

[Term Loan Credit Agreement among JELD-WEN Holding, inc., JELD-WEN, inc., Onex BP

Finance LP, several lenders from time to time parties thereto, and Bank of America, N.A.,

as Administrative Agent]

ANNEX A

56

4. Fixed Charges

In a Cash Flow Facility:

“Fixed Charges”: with respect to any Person for any period, the sum of

(1) Consolidated Interest Expense of such Person for such period, and

(2) all cash dividend payments (excluding items eliminated in consolidation) on any series of Prefer

red Stock or Disqualified Stock of such Person and its Restricted Subsidiaries;

provided, however, that, notwithstanding the foregoing, any charges arising from (i) the application

of Accounting Standards Codification Topic 480-10-25-4 “Distinguishing Liabilities from Equity—

Overall—Recognition” to any series of Preferred Stock other than Disqualified Stock or (ii) the

application of Accounting Standards Codification Topic 470-20 “Debt—Debt with Conversion

Options—Recognition,” in each case, shall be disregarded in the calculation of Fixed Charges.

[Term Loan Credit Agreement among JELD-WEN Holding, inc., JELD-WEN, inc., Onex BP Finance

LP, several lenders from time to time parties thereto, and Bank of America, N.A., as Administrative

Agent]

ANNEX A

57

In an ABL Facility:

“Fixed Charges”: with respect to any Person for any period, without duplication, the sum of

(1) Consolidated Interest Expense of such Person paid in cash for such period; plus

(2) scheduled principal payments of such Person on long-

term Indebtedness made during such period; plus

(3) Restricted Payments made pursuant to Section 6.3(b)(x) during such period; plus

(4) Restricted Payments made pursuant to Section 6.3(b)(xv) during such period; plus

(5) payments of management, monitoring, consulting and advisory fees (including termination fee

s) and related expenses paid or

accrued in such period to the Permitted Investors or any Affiliates thereof (to the extent otherwise

permitted under Section 6.6); plus

(6) taxes paid in cash or tax distributions in lieu thereof paid during such period;

ANNEX A

58

provided that, notwithstanding the foregoing, any charges arising from (i) the application of

Accounting Standards Codification Topic 480-10-25-4 “Distinguishing Liabilities from Equity

Overall Recognition” to any series of Preferred Stock other than Disqualified Stock or (ii) the

application of Accounting Standards Codification Topic 470-20 “Debt-Debt with Conversion

Options—Recognition,” in each case, shall be disregarded in the calculation of Fixed Charges.

[Revolving Credit Agreement, dated as of October 15, 2014, among JELD-WEN Holding, Inc.,

JELD-WEN, Inc., other borrower and guarantors party thereto, Wells Fargo Bank, National

Association, as Administrative Agent and Bank of America, N.A., as Syndication Agent]

ANNEX A

59

5. Excess Cash Flow

“Excess Cash Flow” means, for any period, an amount equal to

(a) the sum, without duplication, of

(i) Consolidated Net Income for such period,

(ii) an amount equal to the amount of all non-cash charges (including depreciation and

amortization) to the extent deducted in arriving at such Consolidated Net Income,

(iii) decreases in Consolidated Working Capital and long-term accounts receivable of the

Borrower and its Restricted Subsidiaries for such period (other than any such decreases

arising from acquisitions or dispositions by the Borrower and its Restricted Subsidiaries

completed during such period) and

(iv) an amount equal to the aggregate net non-cash loss on Dispositions by the Borrower

and its Restricted Subsidiaries during such period (other than sales in the ordinary course of

business) to the extent deducted in arriving at such Consolidated Net Income minus

ANNEX A

60

(b) the sum, without duplication, of

(i) an amount equal to the amount of all non-cash credits included in arriving at such

Consolidated Net Income and cash charges included in clauses (a) through (m) of the

definition of “Consolidated Net Income,”

(ii) without duplication of amounts deducted pursuant to clause (xi) below in prior fiscal

years, the amount of Capital Expenditures or acquisitions of intellectual property to the

extent not expensed and Capitalized Software Expenditures accrued or made in cash or

accrued during such period, to the extent that such Capital Expenditures or acquisitions were

financed with internally generated cash or borrowings under the Revolving Credit Facility and

were not made by utilizing the Cumulative Retained Excess Cash Flow Amount,

(iii) the aggregate amount of all principal payments of Indebtedness of the Borrower or its

Restricted Subsidiaries (including (A) the principal component of payments in respect of

Capitalized Financing Leases, (B) the amount of any scheduled repayment of Term Loans

pursuant to Section 2.07(a) and

ANNEX A

61

(C) any mandatory prepayment of Term Loans pursuant to Section 2.05(b)(ii) to the extent

required due to a Disposition that resulted in an increase to Consolidated Net Income and

not in excess of the amount of such increase but excluding (X) all other voluntary and

mandatory prepayments of Term Loans, (Y) all prepayments of Revolving Credit Loans and

Swing Line Loans made during such period and (Z) all payments in respect of any other

revolving credit facility made during such period, except in the case of clause (Z) to the

extent there is an equivalent permanent reduction in commitments thereunder), to the extent

financed with internally generated cash,

(iv) an amount equal to the aggregate net non-cash gain on Dispositions by the Borrower

and its Restricted Subsidiaries during such period (other than Dispositions in the ordinary

course of business) to the extent included in arriving at such Consolidated Net Income,

(v) increases in Consolidated Working Capital and long-term accounts receivable of the

Borrower and its Restricted Subsidiaries for such period (other than any such increases

arising from acquisitions or dispositions by the Borrower and its Restricted Subsidiaries

during such period),

ANNEX A

62

(vi) cash payments by the Borrower and its Restricted Subsidiaries during such period in

respect of long-term liabilities of the Borrower and its Restricted Subsidiaries other than

Indebtedness,

(vii) without duplication of amounts deducted pursuant to clause (xi) below in prior fiscal

years, the amount of Investments and acquisitions made during such period by the Borrower

and its Restricted Subsidiaries on a consolidated basis pursuant to Section 7.02 to the

extent that such Investments and acquisitions were financed with internally generated cash

and were not made by utilizing the Cumulative Retained Excess Cash Flow Amount,

(viii) the amount of Restricted Payments paid during such period pursuant to Section 7.06(h),

Section 7.06(g)(x) or Section 7.06(f) to the extent such Restricted Payments were financed

with internally generated cash or borrowings under the Revolving Credit Facility,

(ix) the aggregate amount of expenditures actually made by the Borrower and its Restricted

Subsidiaries in cash during such period (including expenditures for the payment of financing

fees) to the extent that such expenditures are not expensed during such period,

ANNEX A

63

(x) the aggregate amount of any premium, make-whole or penalty payments actually paid in

cash by the Borrower and its Restricted Subsidiaries during such period that are required to

be made in connection with any prepayment of Indebtedness,

(xi) without duplication of amounts deducted from Excess Cash Flow in prior periods, the

aggregate consideration required to be paid in cash by the Borrower and its Restricted

Subsidiaries pursuant to binding contracts (the “Contract Consideration”) entered into prior to

or during such period relating to Permitted Acquisitions or Capital Expenditures or

acquisitions of intellectual property to the extent not expensed to be consummated or made,

plus any restructuring cash expenses, pension payments or tax contingency payments that

have been added to Excess Cash Flow pursuant to clause (a)(ii) above required to be made,

in each case during the period of four consecutive fiscal quarters of the Borrower following

the end of such period, provided that to the extent the aggregate amount of internally

generated cash not utilizing the Cumulative Retained Excess Cash Flow Amount actually

utilized to finance such Permitted Acquisitions, Capital Expenditures or acquisitions of

intellectual property during such period of four consecutive fiscal quarters is less than the

Contract Consideration, the amount of such shortfall shall be added to the calculation of

Excess Cash Flow at the end of such period of four consecutive fiscal quarters,

ANNEX A

64

(xii) the amount of cash taxes paid in such period to the extent they exceed the amount of

tax expense deducted in determining Consolidated Net Income for such period,

(xiii) cash expenditures in respect of Swap Contracts during such fiscal year to the extent not

deducted in arriving at such Consolidated Net Income and (xiv) any payment of cash to be

amortized or expensed over a future period and recorded as a long-term asset.

Notwithstanding anything in the definition of any term used in the definition of “Excess Cash

Flow” to the contrary, all components of Excess Cash Flow shall be computed for the

Borrower and its Restricted Subsidiaries on a consolidated basis.

[Term Loan Credit Agreement among JELD-WEN Holding, inc., JELD-WEN, inc., Onex BP

Finance LP, several lenders from time to time parties thereto, and Bank of America, N.A., as

Administrative Agent]

ANNEX A

65

6. Pro Forma Basis

“Pro Forma Basis”: for the purposes of calculating Consolidated EBITDA for any period of four

consecutive fiscal quarters or trailing twelve month period, as applicable (each, a “Reference

Period”),

if, at any time during such Reference Period, the Company or any Restricted Subsidiary

shall have made any Disposition, the Consolidated EBITDA for such Reference Period

shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable

to the property that is the subject of such Disposition for such Reference Period or

increased by an amount equal to the Consolidated EBITDA (if negative) attributable

thereto for such Reference Period and

if, during such Reference Period, the Company or any Restricted Subsidiary shall have

made an acquisition of assets constituting at least a division of a business unit of, or all or

substantially all of the assets of, any Person, Consolidated EBITDA for such Reference

Period shall be calculated after giving pro forma effect thereto as if such acquisition of

assets constituting at least a division of a business unit of, or all or substantially all of the

assets of, any Person, occurred on the first day of such Reference Period

ANNEX A

66

(including, in each such case, such pro forma adjustments relating to a specific transaction or event and

reflective of actual or reasonably anticipated synergies and cost savings expected to be realized or

achieved in the twelve months following such transaction or event, which pro forma adjustments shall be

certified by the chief financial officer, treasurer, controller or comptroller of the Borrower Representative;

provided that all such adjustments shall not exceed the percentage limitations thereon, if any, set forth in

the definition of “Consolidated EBITDA”.)

The term “Disposition” in this definition shall not include dispositions of inventory and other ordinary

course dispositions of property.

[Revolving Credit Agreement, dated as of October 15, 2014, among JELD-WEN Holding, Inc., JELD-

WEN, Inc., other borrower and guarantors party thereto, Wells Fargo Bank, National Association, as

Administrative Agent and Bank of America, N.A., as Syndication Agent]

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