Will REZI require a covenant amendment or waiver by end of 2026?

The leverage correction from 5.5x to 3.9x is decisive — the prior context's stress scenarios were built on a false starting point and are no longer applicable at current EBITDA levels. However, the H2 2026 ADI separation introduces a material non-distress pathway to amendment: debt reallocation between RemainCo and SpinCo almost certainly requires lender consent and credit agreement modification, which would constitute a covenant amendment even without financial stress. The 3.9x current leverage with 4.0x max (0.1x headroom) also remains technically tight pending the first 2026 covenant test.

Corrected leverage at 3.9x with strong EBITDA trajectory toward 3.3-3.5x makes a distress-driven covenant amendment very unlikely — this is the primary driver of the downward revision from 48%. The remaining probability is almost entirely attributable to the separation event: PE-backed separations routinely require amendment to credit facilities for debt reallocation, intercreditor agreements, and release of subsidiary guarantors. CD&R's deep lender relationships reduce execution risk but do not eliminate the need for formal amendment. If separation is delayed or restructured, this probability falls further.

The aggregate probability must reflect two distinct pathways: (1) distress-driven — now very low given 3.9x actual leverage and improving trajectory, estimated ~5-8%; (2) separation-structural — ADI spin-off requires debt restructuring with high probability of triggering formal amendment, estimated ~15-18%. The separation pathway is somewhat speculative because the Form 10 has not yet been filed and debt allocation terms are undisclosed, but corporate separations from PE-backed companies with $3.2B in credit facilities almost always require formal lender consent processes. The 20% adjusted OCF recovery (+2% YoY to $453M) further reduces concern about near-term covenant breach.

Weighting the improved financial profile (3.9x leverage, $833M EBITDA, improving trajectory) against the separation variable produces a balanced downward revision from 48%. Current headroom of 0.1x is tight and creates risk around Q1 2026 covenant test before full-year EBITDA improvement materializes, but guidance credibility is high given Snap One synergies delivered ahead of schedule. The separation event remains the largest single risk factor — debt allocation between RemainCo/SpinCo is undisclosed and could require amendment regardless of underlying business performance.

The corrected leverage figure resolves the primary driver of the prior 48% probability — Spruce Point's 5.5x calculation was based on exclusion of ~$245M in credit agreement add-backs, which are legitimate and standard in PE-backed credit agreements. With actual covenant leverage at 3.9x and trajectory toward 3.3-3.5x, the business must materially underperform 2026 guidance for distress-driven amendment risk to re-emerge. Separation is real but uncertain — 'amendment' requires precise definition; some separation mechanics (e.g., restricted payment baskets, carve-outs) may not require formal amendment. Leaning slightly below 25% on this ambiguity.

Slightly elevated relative to other sonnet runs due to the structural observation that REZI has already amended its covenant once (Aug 2025), establishing a pattern and potentially signaling lender willingness to accommodate. The separation timeline (H2 2026, Form 10 not yet filed) creates meaningful execution uncertainty — if the Form 10 is filed mid-2026 and separation occurs in Q4, the debt reallocation and intercreditor mechanics will likely require credit agreement modifications that would be disclosed in 8-K filings and count as amendments for resolution purposes. The 28% reflects the combination of improving base fundamentals (pushing down) and structural separation uncertainty (pushing up).

Anchoring on the corrected data: 3.9x actual leverage vs 4.0x covenant maximum, with 2026 EBITDA guidance implying 3.3-3.5x. At 3.3-3.5x projected leverage, the business has 0.5-0.7x headroom under the 4.0x covenant — sufficient to absorb moderate operational variance without breach. The previous 48% estimate relied on 5.5x starting leverage that has been corrected. Base case requires no amendment.

The numbers as reported make covenant amendment unlikely as a financial necessity: leverage trajectory is improving, EBITDA is at record levels, and cash generation has recovered. Slight premium over run 1 reflects the existing amendment pattern (Aug 2025) and 72% floating rate exposure — if rates rise 150-200bp, interest expense increases and EBITDA coverage compresses. However, at 3.9x and improving, even a 100bp rate shock does not push leverage above 4.0x given the EBITDA trajectory.

The lowest run in the ensemble. The data is clear: 3.9x covenant leverage vs 4.0x maximum, guided to 3.3-3.5x in 2026. Revenue grew 11% to $7.5B record, EBITDA grew 20% to $833M record, and synergies were delivered early. The prior 48% probability was driven by incorrect Spruce Point leverage calculation. With corrected data, amendment probability is in the low teens to mid-teens. Separation is the wild card but is speculative — no Form 10 filed, terms unknown.