Financial covenant and On the run: Difference between pages

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''Loan documentation. ''
The most recently issued of a series of similar securities from an issuer.


A financial covenant is a clause in a loan agreement that commits the borrower to operate within predefined financial constraints.
For example, the most recently issued 10 year US treasury (government) bond is on the run. Earlier issues are 'off the run'.


In general, there is greater liquidity in the on the run issue. This can be reflected in higher price, lower yield. The higher liquidity occurs as the issue finds its way to longer-term holders' portfolios from primary dealers and more speculative buyers, prime brokers.


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 term can also be applied to derivatives related to securities.


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.


==See also==


For example, an interest cover covenant might state that interest cover will be no less than 3 times.
* [[Off the run]]


The borrower promises that the ratio will always exceed the set figure.
[[Category:Corporate_financial_management]]
 
[[Category:Investment]]
 
[[Category:Long_term_funding]]
Financial covenants are tested at certain pre-determined intervals, for example annually.
[[Category:Treasury_operations]]
 
[[Category:Financial_products_and_markets]]
 
Commonly used financial covenants on loan agreements, in addition to minimum interest cover, include:
 
:1. Minimum tangible net worth – as this is a measure of solvency
 
:2. Ratio of maximum borrowings to tangible net worth – to preserve the level of solvency
 
:3. Net or gross debt to EBITDA (times) – measure of liquidity
 
:4. Ratio of current assets to current liabilities, and minimum level of working capital – which are other measures of liquidity
 
:5. Limitations on payment of dividends as a ratio of earnings – to preserve net worth
 
 
Breach of a financial covenant would normally constitute an event of default.
 
 
== See also ==
* [[Breach of covenant]]
* [[Condition]]
* [[Contract]]
* [[Covenant]]
* [[Cross acceleration]]
* [[Debt to EBITDA ratio]]
* [[Default]]
* [[EBITDA]]
* [[Event of default]]
* [[Financial ratio]]
* [[Frozen GAAP]]
* [[Headroom]]
* [[Interest cover]]
* [[Interest rate risk]]
* [[Liquidity]]
* [[Loan agreement]]
* [[Loan to value]]
* [[Representations and warranties]]
* [[Risk]]
* [[Solvency]]
* [[Tangible net worth]]
* [[Translation risk]]
* [[Waiver]]
* [[Working capital]]
 
[[Category:Treasury_operations_infrastructure]]

Revision as of 21:46, 18 April 2016

The most recently issued of a series of similar securities from an issuer.

For example, the most recently issued 10 year US treasury (government) bond is on the run. Earlier issues are 'off the run'.

In general, there is greater liquidity in the on the run issue. This can be reflected in higher price, lower yield. The higher liquidity occurs as the issue finds its way to longer-term holders' portfolios from primary dealers and more speculative buyers, prime brokers.

The term can also be applied to derivatives related to securities.


See also