CM-003
Scenario
This case tests extraction of negative covenants with material carve-outs. The Gamma Consortium syndicated facility contains two negative covenants — a no-additional-debt restriction and a no-disposal-of-assets restriction — each with multiple permitted exceptions that represent real carve-outs with quantitative caps. The challenge is that models frequently extract the prohibition without capturing the carve-outs, producing an over-restrictive picture of the borrower's obligations. This case tests: (1) correct identification of both negative covenants, (2) explicit extraction of each carve-out with its scope and cap, and (3) correct classification as "negative" type.
Input
Document: gamma-consortium-syndicated.pdf
Task: Identify all negative covenants in this agreement. For each, extract: covenant description, type classification, the principal restriction, and all carve-outs including any quantitative thresholds or conditions attached to each carve-out.
Expected Output
Negative Covenant 1 — No Additional Financial Indebtedness
Type: Negative
Principal restriction: No member of the Group shall incur or permit to subsist any financial indebtedness other than Permitted Financial Indebtedness.
Carve-outs (Permitted Financial Indebtedness):
| Carve-out | Scope | Cap |
|---|---|---|
| Indebtedness under the Finance Documents | Amounts outstanding under this Agreement | No cap |
| Existing indebtedness | Indebtedness outstanding at the date of this Agreement as disclosed in Schedule 7 | No cap — existing only, not renewable |
| Subsidiary intercompany debt | Indebtedness between members of the Group | No cap — intra-Group only |
| Hedging agreements | Financial indebtedness arising under interest rate or currency hedging entered into in the ordinary course of business | No cap in notional amount |
| Trade finance | Documentary letters of credit and performance bonds | USD 25,000,000 in aggregate outstanding at any time |
| General basket | Any other financial indebtedness | USD 15,000,000 in aggregate outstanding at any time |
Negative Covenant 2 — No Disposal of Material Assets
Type: Negative
Principal restriction: No member of the Group shall sell, transfer, lease, or otherwise dispose of any asset unless it is Permitted Disposal.
Carve-outs (Permitted Disposals):
| Carve-out | Scope | Condition |
|---|---|---|
| Disposals in ordinary course | Inventory and assets sold in ordinary course of business | Must be at arm's length and for fair market value |
| Asset disposals below threshold | Any single asset or related series of assets | Aggregate proceeds ≤ USD 10,000,000 per financial year |
| Obsolete / surplus assets | Assets no longer required for business operations | No financial cap; Facility Agent notification required |
| Intra-Group transfers | Transfer to another member of the Group | Transferee must become an Obligor or granting security |
Ground Truth Citation
No Additional Debt (Principal Restriction)
"No Obligor shall, and the Borrower shall ensure that no member of the Group shall, incur or permit to subsist any Financial Indebtedness other than Permitted Financial Indebtedness."
Source: gamma-consortium-syndicated.pdf, Page 42, Clause 25.3 (Negative Covenants — Financial Indebtedness)
Permitted Financial Indebtedness — Trade Finance Carve-out
"For the purposes of this Agreement, 'Permitted Financial Indebtedness' means: ... (e) documentary letters of credit and performance bonds issued for the account of any Group member, provided that the aggregate outstanding face amount of all such instruments does not exceed USD 25,000,000 at any time; and (f) any other Financial Indebtedness not falling within paragraphs (a) to (e) above, provided that the aggregate outstanding amount does not exceed USD 15,000,000 at any time."
Source: gamma-consortium-syndicated.pdf, Page 14, Clause 1.1 (Definitions — Permitted Financial Indebtedness)
No Disposal of Material Assets (Principal Restriction)
"No Obligor shall, and the Borrower shall ensure that no member of the Group shall, enter into a single transaction or a series of transactions (whether related or not) and whether voluntary or involuntary, to sell, lease, transfer or otherwise dispose of any asset, except for a Permitted Disposal."
Source: gamma-consortium-syndicated.pdf, Page 44, Clause 25.6 (Negative Covenants — Asset Disposals)
Permitted Disposals — Threshold Carve-out
"'Permitted Disposal' includes: ... (b) any disposal of assets where the aggregate net proceeds of such disposal (together with the net proceeds of all other disposals in the same financial year) do not exceed USD 10,000,000 in any financial year."
Source: gamma-consortium-syndicated.pdf, Page 16, Clause 1.1 (Definitions — Permitted Disposal)
Scoring Criteria
| Condition | Score |
|---|---|
| Both covenants identified and classified as "negative"; all carve-outs listed for each covenant with correct caps; USD 25M and USD 15M limits for debt carve-outs correctly associated | 1.0 |
| Both covenants identified; carve-outs listed but USD caps missing or incorrect for one carve-out | 0.75 |
| Both covenants identified; carve-outs described qualitatively but USD caps omitted entirely | 0.50 |
| Only one of two negative covenants identified | 0.50 maximum |
| Principal restriction stated but carve-outs entirely absent | 0.25 for that covenant |
| Any carve-out cap value fabricated (e.g., "USD 20M" stated when document says USD 25M) | 0.0 (case-level) |
Known Failure Modes
- Extracting the negative covenant prohibition without listing any carve-outs, producing an incomplete and misleading output.
- Conflating the USD 25M trade finance limit (letters of credit / performance bonds) with the USD 15M general basket.
- Missing the "aggregate" qualifier on the USD 10M asset disposal limit — stating it as a per-transaction limit rather than a per-year aggregate.
- Classifying the asset disposal covenant as "positive" (because it specifies conditions) rather than "negative" (because the primary obligation is a prohibition).
Regression Note
N/A — initial case