Financial covenant and Ponzi scheme: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Mend link.)
 
imported>Doug Williamson
(Create page. Source: Oxford English Dictionary.)
 
Line 1: Line 1:
''Loan documentation. ''
''Fraud - investment.''


A financial covenant is a clause in a loan agreement that commits the borrower to operate within predefined financial constraints.
A Ponzi scheme is a type of investment fraud.


An illusion of high rates of investment return is created by making payments to early investors out of the proceeds from later investments.


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.
This is an unsustainable structure, dependent for its continuation on attracting ever-larger numbers of investors.
 
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.
 
 
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.
 
 
Financial covenants are tested at certain pre-determined intervals, for example annually.
 
 
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 ==
== See also ==
* [[Breach of covenant]]
* [[Fraud]]
* [[Condition]]
* [[Pyramid selling]]
* [[Contract]]
* [[Misrepresentation]]
* [[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]]
[[Category:The_business_context]]
[[Category:Investment]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Financial_products_and_markets]]

Revision as of 01:06, 29 December 2020

Fraud - investment.

A Ponzi scheme is a type of investment fraud.

An illusion of high rates of investment return is created by making payments to early investors out of the proceeds from later investments.

This is an unsustainable structure, dependent for its continuation on attracting ever-larger numbers of investors.


See also