Debt Covenant Compliance

Question 1

What is a debt covenant?

Answer 1

Part of a larger contract underlying the debt instrument. It is a section of the contract that descries the responses available to the creditor if certain events or conditions occur, such as the debtor’s current ratio declining below a certain level.

Question 2

What is the classification of a liability callable on demand if debt covenant is violated and it is probable that the debtor will cure violation?

Answer 2

Noncurrent Liability

Question 3

List some examples of specific attributes in a covenant

Answer 3

Minimum Current Ratio, Maximum Debt to Equity Ratio.

Question 4

Give an example of a response by a creditor if the debt covenant is violated by the debtor

Answer 4

Require the debtor to pay the debt or refinance the debt

Question 5

What is the classification of liability subject to a subjective acceleration clause?

Answer 5

Current if it is possible the debt will be called; noncurrent if a remote chance exists of calling the debts

Question 6

Define covenant-lite loan

Answer 6

Loan with less stringent restrictions. Provide less protection for the creditor

Question 7

Define debt covenant compliance

Answer 7

Steps taken by debtor to meet the restriction and reporting such compliance

Question 8

What is the classification of liabilities that are due on demand?

Answer 8

Current Liability