Debt Covenant Compliance Flashcards
What is a debt covenant?
Clause which protects the creditor to ensure that they collect the cash flow or interest
The more risky the debtor the more restrictions
What are included in a debt covenants?
Minimums: Current ratio, working capital, interest coverage, EPS, net worth, debt rating
Maximums: Debt to equity ratio, balance in treasury stock, dividend payout, additional borrowings after the loan is provided
Prohibition on risky investments
If a covenant is violated, what can happen?
Call the debt immediately
Allow for a grace period after which the debt can be called
Increase the interest rate on the debt
Accelerate the payment terms
Require that assets be used as collateral
Impose additional restrictions
Agree to renegotiate the debt
Seek legal action such as a breach of contract lawsuit
