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| ''Loan documentation. ''
| | A situation in which market interest rates for longer term funds are lower than those for shorter maturities. |
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| A financial covenant is a clause in a loan agreement that commits the borrower to operate within predefined financial constraints.
| | Also known as a negative yield curve or a falling yield curve. |
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| Its purpose is to impose a level of financial discipline on the borrower such that the borrower acts within the limits imposed by the constraints. The clause also aims to prevent the borrower from acting in a manner that is likely to reduce credit worthiness during the time period that the loan is outstanding.
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| For example, an interest cover covenant might state that interest cover will be no less than 3 times; the borrower promises that the ratio will always exceed the set figure.
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| Financial covenants are tested at certain pre-determined intervals; annually, in the above example.
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| Commonly used financial covenants on loan agreements, in addition to minimum interest cover, include:
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| 1. Minimum tangible net worth – as this is a measure of solvency
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| 2. Ratio of maximum borrowings to tangible net worth – to preserve the level of solvency
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| 3. Net or gross debt to EBITDA (times) – measure of liquidity
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| 4. Ratio of current assets to current liabilities, and minimum level of working capital – which are other measures of liquidity
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| 5. Limitations on payment of dividends as a ratio of earnings – to preserve net worth
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| Breach of a financial covenant would normally constitute an event of default.
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| == See also == | | == See also == |
| * [[Contract]] | | * [[Negative yield curve]] |
| * [[Covenant]] | | * [[Phillips curve]] |
| * [[EBITDA]] | | * [[Yield curve]] |
| * [[Event of default]]
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| * [[Frozen GAAP]]
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| * [[Headroom]]
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| * [[Interest rate risk]]
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| * [[Loan agreement]]
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| * [[Translation risk]]
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| * [[Waiver]]
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| [[Category:Treasury_operations_infrastructure]]
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Revision as of 14:54, 13 November 2015
A situation in which market interest rates for longer term funds are lower than those for shorter maturities.
Also known as a negative yield curve or a falling yield curve.
See also
