What covenants a fintech lender's first credit line carries, with the levels in filed agreements
Four kinds of covenant, read from three warehouse lines filed with the SEC: an advance of 50% to 80%, a first trigger at a 13.0% default ratio, net worth and cash tests on the parent.
A first warehouse line carries four kinds of covenant: a borrowing base tested at every draw, portfolio triggers in two tiers, financial covenants on the parent company, and control events. In lines filed with the SEC the advance ran 50% to 80% of eligible loans, the line stopped revolving at a 13.0% default ratio and defaulted at 16.0%.
Levels as written in three US warehouse lines for fintech lenders. Sources: Upstart and Goldman Sachs, credit agreement of 22 May 2020; Sezzle and Goldman Sachs, amendment and guaranty of 25 February 2022; On Deck, Form 8-K, 8 August 2018.
| Family | Level in a filed line | If breached |
|---|---|---|
| Borrowing base, tested at every draw | Advance 50% to 80% of eligible loans (Upstart); 70% senior (Sezzle) | 2 business days to cure, then default |
| Concentration limits | One state 25.0%, top three 50.0%, loans over $25,000 45.0% (Upstart) | Excess cut from the base |
| Portfolio trigger, tier one | Defaults 13.0%, delinquency 16.0% (Upstart); loss 5.00% (Sezzle) | Line stops revolving |
| Portfolio trigger, tier two | Defaults 16.0%, delinquency 19.0% (Upstart) | Event of default |
| Parent company | Net worth $15m to $30m; leverage 8 to 12 times; cash the greater of $7.5m and 7.5% of the line (Sezzle) | Default under the guaranty |
| Control events | Owners under 51.0%; founders not replaced in 60 days; backup servicer 10 business days (Upstart) | Default |
Only one family is a credit test in the ordinary sense. The borrowing base and the concentration limits decide how much the lender may draw, the parent covenants test the company rather than the loans, and the control events test people and contracts.
The borrowing base is the covenant tested at every draw
A warehouse line does not lend a fixed sum. It lends a share of the loans that qualify. In the credit agreement between Upstart's loan trust and Goldman Sachs, dated 22 May 2020 and filed with the SEC, that share runs from 80.00% for the best grades of 36 and 60 month loans down to 50.00% for 60 month loans of grade F. Every borrowing request carries a calculation statement, and failure to satisfy the advance test «within two (2) Business Days following the relevant test date» is an event of default.
The percentage applies only to eligible loans. A loan more than thirty days past due leaves the base as delinquent, a loan 120 days late as defaulted, and the advance is computed on what remains. Sezzle's line with the same bank, amended on 25 February 2022 and filed as Exhibit 10.3 to its Form 8-K, sets its senior advance at 70% when the weighted average FICO score of the pool is 580 or more. As an illustration of the arithmetic only: a lender with a fifth of its book ineligible draws an 80% advance on the other four fifths, which is 64% of the book.
Concentration limits shrink the base instead of breaking the line
The Upstart agreement, Exhibit 10.11 to the company's Form S-1, names eleven limits. Loans to borrowers with a credit score below 660 above 25.0% of the pool, the largest state above 25.0%, the three largest states above 50.0%, loans larger than $25,000 above 45.0%, borrowers with less than three years of history with the servicer above 4.0%, deferred loans above 4.0%. None of them is a breach. The amount above each limit is subtracted from the borrowing base, so a concentrated book simply borrows less from the first day.
Portfolio triggers come in two tiers, and the first one already takes the cash
The first tier ends the revolving period: the lender can no longer draw, and collections go to repay the line. In the Upstart agreement it is reached when the three month rolling average loan default ratio exceeds 13.0%, or the delinquency ratio exceeds 16.0%, or the net interest margin falls below a stated floor. The second tier, an event of default, sits at 16.0% and 19.0%. On Deck described the same structure for its ODAF II facility in a Form 8-K of 8 August 2018: a maximum three month average delinquency rate, a maximum three month average annualized gross default ratio, a minimum excess spread, and a breach that leads to «an early amortization event, an increase in the interest rate payable on the loans and/or the termination» of the facility.
The ratios are annualised. The agreement defines the default ratio as «the product of (i) 12 times (ii) the ratio» of loans that defaulted in the month to the opening balance, so a lender that reads its own monthly default rate as 1.1% is at 13.2% on the contract's definition. The levels follow the asset. Sezzle's book of short pay-later instalments amortises when its principal loss ratio exceeds 5.00% or the default ratio of any single vintage, the loans made in one period, exceeds 4.00% (Form 8-K, 2022). A lender should expect its own triggers to be set from its own history, read as a static pool, loans grouped by the month they were made.
annualised three month default ratio at which Upstart's line stopped revolving
Read from the credit agreement of 22 May 2020. The event of default sat at 16.0%.
Net worth, leverage and cash covenants sit with the parent company
The Upstart credit agreement contains no tangible net worth covenant and no minimum liquidity, because the borrower is a trust that holds loans and nothing else. Covenants on the operating company live in the sponsor's guaranty, and in Sezzle's case the guaranty was filed with the SEC in February 2022. Sezzle had to keep tangible net worth of at least $15.0 million, or $30.0 million once advances passed $125.0 million; leverage no higher than 8.00 to 1, rising to 12.00 to 1 after 31 March 2022; and unrestricted cash of at least the greater of $7.5 million and 7.5% of the funded facility. On Deck's 8-K lists the same four for its line: minimum tangible net worth, maximum leverage, minimum consolidated liquidity and minimum unrestricted cash.
Control events are covenants about people, owners and the servicer
The Upstart line filed with the SEC defaults if its permitted holders fall below 51.0% of the voting power, if either of two named founders leaves and is not replaced «by a person acceptable to the Required Lenders within 60 days», if other debt of $5 million or more defaults, or if a successor backup servicer, the firm contracted in advance to collect the loans if the lender cannot, is not appointed within ten business days after that backup servicer defaults or its agreement ends. The agent may inspect the books twice in each fiscal year, and without limit after a default.
Only one of the four families tests the loans as credit. The other three test how much you may draw, how strong the parent is, and who is still running the business.
In the one Mexican lender that itemised its lines, the company loans broke and the trust lines held
Mexican facility agreements are not public, so their covenant levels are not either. The closest record is the Form F-4 that Covalto, the holding company of the lender Credijusto, filed with the SEC on 3 January 2023. It describes the loan agreements only as including «covenants and restrictions that require, among other things, compliance with certain measures and ratios», and then names the breaches: at 30 September 2022 the company was in compliance «except in the case of various covenants set forth in loan agreements with Calvert Capital Impact Inc, Tactical Infrastructure S.A., U.S. International Development Finance Corporation, PG Impact, and Blue Like An Orange Sustainable Capital Latin America Holdings I», all cured by the date of the filing.
The same Form F-4 shows four of those five loans unsecured and the fifth secured by a pledge and a debt service reserve account rather than by the loans. None of the breaches was under the two lines secured on the loan book through a trust, from Goldman Sachs and from the development bank FIRA. Our reading: covenants on a company are tested on its accounts, which move with the whole business, while a line secured on the book tests the loans and shrinks the advance before it ever reaches a default.
Questions this raises
- What covenants does a fintech lender's first institutional credit line usually carry?
- Four kinds: a borrowing base test at every draw, with concentration limits deducted from the base; portfolio performance triggers in two tiers; financial covenants on the parent company, such as tangible net worth, leverage and unrestricted cash; and control events such as a change of owner, the loss of named founders or of the backup servicer.
- What is a borrowing base in a warehouse line?
- The amount the lender may draw: eligible loans, less the amount above each concentration limit, times the advance rate. In Upstart's 2020 line with Goldman Sachs the advance ran from 80.00% to 50.00% by grade and term, and a failed test had to be cured within two business days.
- What is an accelerated amortization event?
- The first tier of portfolio trigger. The revolving period ends, the lender cannot draw, and collections repay the line. In Upstart's 2020 line it came at a three month average annualised default ratio above 13.0%; an event of default came at 16.0%.
- Where do tangible net worth and liquidity covenants sit?
- In the parent company's guaranty, not in the credit agreement of the borrowing trust. Sezzle's 2022 guaranty required tangible net worth of $15.0 million or $30.0 million, leverage of no more than 8.00 then 12.00 to 1, and unrestricted cash of at least the greater of $7.5 million and 7.5% of the funded facility.
- Which covenants break first in practice?
- In the one Mexican lender that itemised its facilities, Credijusto in Covalto's 2023 SEC filing, five loan agreements were in breach at 30 September 2022: four unsecured, one secured by a pledge, none of them the two lines secured on the loan book through a trust.
Effect is not a bank, a lender, a broker-dealer, an investment adviser or a credit rating agency. Nothing here is investment, legal, accounting or tax advice. Every level carries the date of the document it was read from, re-read on 12 October 2026.
Where every figure on this page comes from4 sources
- 01Upstart Loan Trust and Goldman Sachs Bank USA, Amended and Restated Revolving Credit and Security Agreement, 22 May 2020, Exhibit 10.11 to Upstart Holdings' Form S-1, U.S. Securities and Exchange Commission, filed 5 November 2020: advance rates, Excess Concentration Amount, Accelerated Amortization Event, Events of Default, Key Man Event, inspection rights.
- 02Sezzle Funding SPE II and Goldman Sachs Bank USA, Amendment No. 3 to Revolving Credit and Security Agreement and Amendment No. 1 to Limited Guaranty and Indemnity Agreement, 25 February 2022, Exhibit 10.3 to Sezzle's Form 8-K: Class A advance rate, Accelerated Amortization Event, financial covenants of the limited guarantor.
- 03On Deck Capital, Inc., Form 8-K, 8 August 2018: covenants of the ODAF II facility.
- 04Covalto Ltd., Form F-4, U.S. Securities and Exchange Commission, 3 January 2023: Credijusto's loan agreements, security, covenant compliance at 30 September 2022.