imported>Doug Williamson |
imported>Doug Williamson |
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| ''Loan documentation. ''
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| A financial covenant is a clause in a loan agreement that commits the borrower to operate within predefined financial constraints.
| | The Global Financial Crisis which started in 2007/08. |
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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.
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| 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.
| | Similar widespread events, usually on at least a national level. |
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| | | For example, the Greek financial crisis. |
| For example, an interest cover covenant might state that interest cover will be no less than 3 times. | |
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| 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, for example annually.
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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 == |
| * [[Breach of covenant]] | | * [[Credit crunch]] |
| * [[Condition]]
| | * [[European Financial Stability Facility]] |
| * [[Contract]]
| | * [[Global Financial Crisis]] |
| * [[Covenant]]
| | * [[Great Depression]] |
| * [[Cross acceleration]]
| | * [[Lehman]] |
| * [[Debt to EBITDA ratio]]
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| * [[Default]]
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| * [[EBITDA]]
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| * [[Event of default]]
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| * [[Financial]] | |
| * [[Financial ratio]] | |
| * [[Frozen GAAP]]
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| * [[Headroom]]
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| * [[Interest cover]]
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| * [[Interest rate risk]]
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| * [[Liquidity]]
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| * [[Loan agreement]]
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| * [[Loan to value]]
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| * [[Representations and warranties]]
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| * [[Risk]]
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| * [[Solvency]]
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| * [[Tangible net worth]]
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| * [[Translation risk]]
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| * [[Waiver]] | |
| * [[Working capital]] | |
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| [[Category:Treasury_operations_infrastructure]] | | [[Category:The_business_context]] |