Compass Minerals (CMP), a salt and fertilizer producer, says it’s “reasonably possible” it’ll violate a key debt covenant as it expects the company’s total leverage ratio to exceed the maximum limit of 4.5x by the the third quarter of its 2022 fiscal year. The company disclosed the matter in its fiscal second quarter— which ended March 31, 2022— which suggests default could occur any day as we’re already midway through the company’s fiscal third quarter.

If Compass violates this financial covenant the company’s lenders could declare it in default and could accelerate the amounts due under its Credit Agreement. A default under this particular agreement would also trigger cross-default provisions within the company’s other debt agreements. The agreement in question is secured by nearly all of the company’s U.S. assets and the Goderich mine in Ontario, Canada— the largest underground rock salt mine in the world.

It’s not the first time Compass has bumped up against its maximum leverage ratio. The company has sought and been granted waivers in the past. Compass says it’ll ask lenders for another waiver or to amend the Credit Agreement with the goal of buying itself at twelve months of wiggle room.

Here, we note a discrepancy between Compass’ quarterly filing and a statement made by the company’s Chief Financial Officer on the May 6, 2022 earnings call. In the filing, Compass says it “has begun discussions” with lenders regarding a waiver or amendment to the leverage ratio. But on the call CFO Lorin Crenshaw suggested the discussion with lenders had not yet begun, and stated:

“...in the coming months, we will proactively engage in discussions with our bank group…”

The earnings call occurred four days prior to the filing so it’s possible Compass contacted its lenders in the small window between the call and filing date. The larger point though is the seeming lack of urgency coming from the CFO. If a violation is imminent, there’s no reason to wait months to address the matter.

Credit has been easy and Compass is used to being granted waivers or amendments on relatively favorable terms— the revolver in question currently carries a 2.4% interest rate, up from 2.1% previously.

But credit is beginning to tighten, or at least cost more.

Waiting to make a new deal despite knowing rates will soon rise further is difficult to comprehend.