Could the convertible notes trigger any covenant breaches or require adjustments to existing covenants?
Covenant‑risk assessment
The $650 million convertible senior‑note issuance will add a sizable amount of senior debt to Centrus’s balance sheet (the notes are due 2032 and are convertible at a fixed price). In a typical credit‑agreement for a company of Centrus’s size, the most‑watched covenants are (i) maximum leverage (total debt ÷ EBITDA or EBIT), (ii) interest‑coverage (EBITDA ÷ interest expense), and (iii) net‑worth or equity‑to‑debt ratios. Adding $650 m of senior debt will raise the numerator in every leverage metric, and the convertible feature does not reduce the principal amount until conversion, so the “as‑issued” debt will be fully counted against existing debt‑covenants. If Centrus currently operates close to its covenant thresholds (e.g., a leverage ratio of 3.0‑3.5× EBITDA is typical for a nuclear‑fuel producer), the new issuance could push the ratio above the permitted ceiling, triggering a covenant breach. Moreover, many covenant packages contain “change‑of‑control” and “convertible‑security” clauses that require the issuer to maintain a minimum equity‑to‑debt ratio; the convertible notes, even though they may be converted to equity later, are treated as senior debt until conversion, so the equity‑to‑debt ratio will deteriorate until the conversion event occurs.
Potential covenant adjustments & trading implications
Because the offering is still “subject to market conditions and other factors,” it is likely that Centrus will have to negotiate a covenant amendment or obtain a waiver from its current lenders before the notes close. Typical remedies include (a) a temporary covenant‑waiver for a set period (often 12–18 months), (b) a covenant‑reset where the covenant thresholds are recalibrated to a higher ratio, or (c) a “net‑worth reset” that adjusts the equity component to account for the convertible nature (i.e., treating a portion of the notes as potential equity). If the company cannot obtain a waiver, the notes may be priced higher to compensate lenders for the higher risk, or the company may have to reduce other debt or raise equity concurrently.
Actionable insight
Monitor Centrus’s latest quarterly 10‑Q and any covenant‑compliance disclosure. If the company’s latest leverage ratio is already >2.8‑3.0× EBITDA, the new issuance is likely to trigger a waiver request; a failure to secure a waiver would be a red flag and could drive the stock lower, while successful covenant restructuring could be a catalyst for short‑term upside. From a trading perspective, a buy‑on‑the‑rumor approach could be justified if you believe the company will secure a covenant amendment (typically accompanied by a modest premium on the notes). Conversely, if the company’s leverage is already near covenant limits, a short‑term short or protective put may be appropriate until the covenant‑waiver status is clarified. In either case, keep an eye on the issuance price and the conversion price; a low conversion price implies more dilution and a larger debt‑to‑equity swing, which could further stress covenants and increase downside risk.