Will FMC breach its 6.0x leverage covenant in 2026?

The 6.0x covenant was specifically renegotiated in December 2025 with the bank group having full visibility into FMC's 2026 plan, including the Q1 trough. Banks do not renegotiate covenants to levels they expect to be breached — the 6.0x was designed to provide adequate headroom. Current covenant leverage is 4.6x, providing 1.4 turns of headroom. Even with Q1's weak $45-50M EBITDA rolling in and a strong prior-year quarter dropping off, the trailing leverage increase would be gradual. The resolution criteria include 'or if FMC discloses a covenant waiver or amendment request,' which is a broader condition. An amendment request is more likely than an actual breach. Probability of breach or amendment request is ~18%.

The key risk period is mid-2026 when trailing-twelve-month EBITDA troughs. If Q1 2026 EBITDA comes in at $45-50M and the strong Q1 2025 quarter drops off, the TTM shifts materially. However, management's H2-weighted EBITDA guidance means the trough is temporary. The scenarios for breach: (1) Q1 materially misses guidance ($35M or below); (2) Q2 also underperforms; (3) seasonal working capital build increases gross debt. Even in this downside scenario, the India sale proceeds (expected Q2-Q3) would reduce debt and improve the ratio. The bank group's cooperation (already demonstrated by the December amendment) suggests willingness to provide additional waivers if needed. Breach probability is low but the amendment request path adds some.

Let me work through the math. Current net debt ~$3.5B. If TTM EBITDA troughs around $650M (below the $670M guide floor due to mix of weak new quarters and dropping strong old quarters), covenant leverage would be ~5.4x ($3.5B / $650M). That's still below 6.0x. For breach, TTM EBITDA would need to fall below ~$583M ($3.5B / 6.0x). This would require 2026 to be substantially worse than the $670M guide floor. Alternatively, if net debt increases to $3.9B (working capital build plus no India sale), the breach threshold rises to $650M. The combined probability of both EBITDA miss and no India sale is what drives this risk. ~20% captures this tail scenario.

The covenant was renegotiated by professional lenders who stress-tested FMC's 2026 plan. The 6.0x limit was set with intentional headroom — banks don't set covenants they expect to be tripped. Current leverage at 4.6x provides meaningful cushion. The India sale is expected to close in H1, reducing debt during the leverage trough period. A breach would require multiple simultaneous negative developments: EBITDA significantly below guidance, India sale delayed, and working capital build worse than planned. The probability of this conjunction is low.

The resolution includes amendment requests, which are more likely than an actual breach. FMC might proactively request an amendment as insurance even if breach is not imminent — companies in distressed situations frequently maintain dialogue with lenders about covenant flexibility. This broadens the YES conditions. However, an amendment request itself would be a mild signal (proactive risk management) rather than a crisis indicator. The probability of either breach or amendment request is higher than the probability of breach alone.

The math supports a low probability. The 1.4x cushion requires a significant deterioration to erode. India sale proceeds arriving in H1-H2 would reduce debt during the critical period. The bank group has already shown willingness to work with FMC (December covenant amendment). Even if leverage approaches 6.0x, a technical waiver is more likely than an actual default event. The key downside scenario — EBITDA significantly below guide AND India sale fails — has maybe 15-20% probability.

Covenant designed with headroom by informed lenders. 1.4 turns of cushion. India sale reduces debt during trough. Low probability of breach. Amendment request adds small probability.

Resolution includes amendment requests, which broadens YES conditions. If EBITDA materially misses and India sale delays, leverage could approach 6.0x. But even then, lenders have shown cooperation. ~20% captures the tail risk of multiple negative developments combining.

4.6x vs 6.0x provides meaningful cushion. Banks renegotiated with full plan visibility. India sale expected H1 reduces debt. Breach requires worst-case scenario. ~18% probability.