Covenants

Question 1

What is a Covenant

Answer 1

A financial test or metric that a company must comply with as part of their lending agreement.

Question 2

Interest Cover

Answer 2

• Ensures company can meet interest payments on debt
• EBITDA / INTEREST
• e.g, EBITDA shall be no less than 4x interest

Question 3

Fixed Charge Cover

Answer 3

• Company can meet interest for borrowing but incorporates fixed charges e.g rent
• EBITDA +Rents / Interest Costs + Rents
• Fixed charged cover shall be no less than 2 x interest

Question 4

Gross Leverage

Answer 4

Test of Gross Debt against company earnings

Gross Debt / Ebitda

Gross Debt shall not exceed 4x Ebitda

Question 5

Net Leverage

Answer 5

Same as Gross but factors in cash

Total Debt - Cash / Ebitda

Question 6

Capitalisation Ratio

Answer 6

Limits amount of balance sheet debt a company can take

Debt / Debt + Equity

Cap ratio should not exceed 50%

Question 7

Debt Service Cover Ratio

Answer 7

More holistic measure of debt service

Incorporates debt amortising and cash flows

CFADS / DEBT + INTEREST

E.G DSCR shall be no less than 1.5

Question 8

Loan to value

Answer 8

Limits amount of leverage in an asset backed deal i.e. Real Estate

Total debt / Asset Valuation

LTV shall not exceed 60%

Question 9

CFADS

Answer 9

Cash flow available for debt service

EBIT
- + depreciation and amortisation

EBITDA
- +/- Changes in working capital
- deduct tax
- deduct dividends
- deduct capex

= CFADS