Advanced Negotiation Issues in Financial Covenants

£725.00 +VAT

If you have 5 or more participants, it may be cost effective to have this Financial Covenants course presented in-house either on your premises or via live webinar.

What Makes This Course Different:

  • The trainer is a Senior Consultant with Debt Explained which provides insight into current market trends in syndicated deals
  • He also is a Senior Consultant to Grant Thornton in Debt Advisory so has visibility into trends in the small and midcap market for corporates and PE
  • He has qualified as a Chartered Accountant (Deloitte) and as a lawyer so is well qualified to understand both the accounting and legal aspects of the financial covenants/ratios
  • His career also includes stints in commercial and investment banking so provides further insight from that angle
  • The course has been presented to numerous large law firms and banks (around Europe) which reinforces the trainer’s market knowledge

Financial Covenants Course Objectives:

  • Understand the interaction of the financial covenants and the capital structure
  • Evaluate the financial covenants in the LMA precedents for leveraged loans
  • Identify the financial covenants in the LMA precedents for real estate (portfolio and development) loans
  • Discuss each financial covenant in detail to understand what it is designed to do
  • Analyse Springing Leverage covenants; where, how and why they developed and what market
  • Discuss the current market trends and how they differ to the LMA approach (e.g. Springing Leverage covenants)
  • Compare the key differences in how these covenants are applied
  • Analyse, in detail, the key components in the financial ratios with particular emphasis on EBITDA (it’s a defined term)
  • Review (with examples) current approach to EBITDA in large deals (what does ‘run rate’ mean in practice)
  • Understand which financial covenants should be applied to different deals (syndicated vs club/bilateral; portfolio vs development real estate deals) and how they differ in practice (e.g. headroom, definitions and add backs)
  • Understand how the financial covenants (and their components) impact the loan in other significant ways (e.g. the various permitted baskets, material subsidiaries)
  • Analyse the Guarantor Coverage Test – how is it applied in practice (what are material subidiaries) different approaches in the various jurisdictions
  • Review equity cures and deemed cures – what’s market
  • Review market date from Debt Explained on current trends on the financial ratios

Financial Covenants Course Content:

Introduction – Interaction of capital structure & financial covenants

  • Types of instruments & impact on the financial covenants
  • What is the purpose of financial covenants
  • Relevance of Capital Structure on Financial Covenants
    • Bullet loans
    • Impact of PIK
  • How the lenders and borrowers approach setting the Financial Covenants

Key financial ratios used by Lenders and typical LMA ratios in leveraged deals

  • Market based financial ratios
  • The four LMA covenants in leveraged deals
  • Leverage ratios (Balance sheet and P&L ratios)
    • Total Debt / EBITDA
    • Senior Debt/ EBITDA
  • Interest coverage ratios
    • EBITDA / Total interest
    • EBITDA / Senior Interest
    • EBITDA / Cash interest
    • [EBITDA – Maintenance Capex] / Cash Interest
    • [EBITDA – Capex] / Cash Interest
  • Cash flow cover (DSCR)
    • CADS / Total Debt Service
    • CADS / Senior Debt service
  • Capex covenant
    • LMA vs Market approach
    • Carry forward / carry back amounts – LMA vs Market approach
    • Add-backs – LMA vs Market

Calculation of EBITDA and Cash flow

    • Simplistic calculation of EBITDA
    • Consistency of application (Accounting changes under IFRS, GAAP etc)
    • Exceptional items – LMA approach, UK GAAP vs IFRS
    • Discontinued Operations – LMA, different approaches of UK GAAP vs IFRS
    • Derivative & Financial Instruments – UK GAAP vs IFRS
    • Pension Items – UK GAAP vs IFRS
  • Current trends affecting EBITDA (aggressive add-backs)
    • Anticipated synergies and cost reductions
    • What are the “typical” requirements for “anticipated synergies”
    • Business optimisation expenses
    • Run-rate EBITDA – how is this calculated
  • Definition of “Cash flow”
    • Why ‘ cash flow’ is not all it seems in the LMA
    • Typical adjustments
    • Sponsor friendly adjustments
    • Potential problems with “cash-flow”

Calculation of Debt and Borrowings and Finance Charges

  • “Total [Net] Debt” and “Senior Total [Net] Debt”
    • “Borrowings” per the LMA
    • Simplistic calculation of Net Debt
    • Example of net debt items
    • Treatment of PE “Debt”
    • Vendor Loans – do they matter
    • Impact of Debt Buybacks and impact on “Debt”
    • Treatment of “trapped” cash on Debt
    • What does “senior” only exclude?
    • What about PIK loans – should they be included in Total Debt?
  • “Borrowings”
    • Treatment of receivables
    • Redeemable shares
    • “Sweeper” clause
  • Finance charges & Net Finance Charges
    • Impact of “PIK”
    • Hedging impact

Finance Leases v Operating Leases – problem areas

  • Current approach
  • Impact of proposed changes to IFRS
  • Which sectors will be affected by the changes
  • Potential problem areas (& solutions) with the new regime
  • Sectors posing particular problems with operating leases

Current market trends

  • Key differences between large vs mid cap vs smaller deals
  • Cov-loose
    • Use and application
    • Typical ratios
  • Cov-lite
    • Use and application
    • Typical ratios
  • Springing Leverage covenants
    • When should the ratio spring
    • Calculating the constituents of the covenants
    • When is the covenant tested
    • Potential problem areas

Application and compliance with the Financial Covenants

  • How many covenants are needed
  • Which companies should be included
    • Definition of “Group”
    • Adjusted EBITDA (effect of acquisitions & disposals)
  • Dealing with “short” periods (i.e. less than 12 months post the deal)
    • Periods shorter than 12 months
    • Typical pitfalls to avoid
  • Frequency of application: When should the ratios be tested
    • Historic TTM/LTM, forecast, both (quarterly, monthly)
    • 2 options per LMA
  • What level of “Headroom” is appropriate
    • What’s market
    • When and why does headroom matter
  • Impact of Clean-ups
  • The Compliance Certificate
    • Typical requirements per LMA Sch 9
    • Current commercial requirements
    • Traps for borrowers
    • When does the breach occur
    • Ramifications of the breach for Lender (traps to avoid)

Equity cures

  • Equity cures – What are they, good or bad
  • What should be cured (EBITDA, Cashflow, Debt)
  • Treatment of “overcures”
  • Is the cure EBITDA? And if yes what effect will this have
  • How should the cash be used? (Why repayment of debt is not appropriate)
  • Deemed cures – what are they and are they worth having?
  • Review of recent lessons from Ideal Standard

Covenants used in Real Estate deals

  • The LMA financial covenants
  • Interest cover – constituents, pros and cons
    • Historical
    • Projected
  • Key differences from the leveraged ratio
    • Calculation periods
    • “Passing Rental” – what is included and what is excluded
    • Difficult / contentious aspects – break clauses, non-rental income, costs/expenses
    • “Finance costs” – treatment of hedging
  • Loan to Value
    • Constituents, pros and cons
    • Items to be netted off

Impact of the Financial Covenants on other aspects of the loan facility

  • Aspects of the loan affected by Leverage test
    • Margin ratchets
    • Cash sweeps
    • Debt incurrence (Incremental/Accordion facilities)
  • Aspects of the loan affected by the definition of EBITDA
    • Material subsidiaries and their relevance
    • Guarantor coverage test
  • Impact and relevance on Grower, Scalable and Builder baskets
    • Key differences
    • Impact on and relevance to the loan facility

Appendices (Not covered in the course but included in an appendix the materials)

Overview of ratios used in Project finance / Infrastructure

  • Annual Debt Service Coverage ratio (“ADSCR”)
  • Loan/Bond Life cover
  • Project Life cover
  • Using the Buffer test

Draft ECB Guidance on Leveraged Transactions

  • Which lenders are affected
  • Which deals are affected
  • EBITDA calculation
  • Ramifications for market players

Background of the Trainer:

The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Explained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland. He has spoken at conferences in the UK, Europe, Australasia & South Africa. He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure/project finance module for the MBA programme at the Cass Business School in London.

Financial Covenants Course Summary:

The loan market in Europe has bifurcated into two main approaches to loan documentation; smaller club and bilateral deals on the one hand, which broadly follow the more lender-friendly LMA approach, and larger syndicated TLB-style deals on the other hand which are increasingly influenced by high yield bonds and invariably are structured on a cov-loose or cov-lite basis. These larger deals also include a far more eclectic approach to the key definitions comprising the ratios with many add-backs taken copied from high yield bonds.

This programme covers financial covenants in leveraged loans and real estate deals and includes specific reference and analysis of the covenants, terms and definitions in the LMA Senior Facilities Agreement for Leveraged transactions and LMA Real Estate precedents.  The programme uses information from the Debt Explained database, to review the current trends in the market in the larger syndicated (TLB-style) deals which so often include springing leverage covenants and high-yield-bond style covenant packages.

The larger syndicated TLBs also vary in approach depending on whether they apply English law or NY law (for example, the latter do not usually permit overcures or require prepayment of loans from equity cure cash).  Direct lenders, which typically use the LMA leverage precedent as a starting point, also tend to adopt a more borrower-friendly approach to the terms in the loan and the financial covenants.

Financial covenants are arguably one of the most heavily negotiated aspects of the Loan Agreement.

Too often; some parties fail to understand the key negotiating issues that really matter, for example they view the financial covenants in isolation rather than appreciating that they must be seen in the context of the particular capital structure. Secondly, too much time is spent on which covenants apply rather than focusing on the key constituents of the key terms in the financial covenant. Finally, many parties fail to appreciate that, even in cov-lite deals, the financial covenants and/or the components of those covenants play an important role as they also affect a wide range of other critical matters in the loan. This usually includes the various “permitted” actions such as debt incurrence (security and guarantees), sponsor payments, cash sweeps, guarantor coverage and grower, scalable and/or builder baskets where these appear.

This Financial Covenants course provides a detailed look at commercial aspects of financial covenants and looks under the bonnet at the critical issues that arise in practice. It provides an in-depth look at the covenants as set out in the Loan Market Association precedent together with other covenants that might be used in practice. Reference is made to the Debt Explained loan database which tracks key terms in the larger syndicated TLB market.

Participants will gain an in-depth view of which covenants should be used together with a detailed analysis of the constituents of the covenants and the sponsor friendly add-backs and other sponsor friendly techniques used by borrowers to manipulate the covenants.

The programme will appeal to practitioners involved in leverage, real estate and infrastructure, such as Lawyers, Private Equity professionals, Bankers in Lending (all departments), Corporate financiers, M&A advisors, Debt advisory and Restructuring. Accounting professionals looking to expand their knowledge of this topic will also benefit as many of the issues embrace legal /documentary considerations. The programme adopts a pan-European approach to the topic but the presenter is able to discuss issues relevant in the USA in view of his exposure to those markets.

To derive full benefit from the programme, it is essential that attendees have a basic understanding of the main / headline elements of a Profit and Loss account (Sales, EBITDA, EBIT etc) and a basic understanding of the differences between P&L /Accrual Accounting and Cash accounting. It is emphasised that participants DO NOT require an understanding of IFRS or GAAP.

A short module summarising the key differences between P&L /Accrual Accounting and Cash Accounting is available on request prior to the programme.

The programme will review the draft ECB guidance on leveraged transactions published in November 2016. The course will examine which type of transactions are covered, which lenders are affected, the approach to EBITDA and the potential implications for players in the debt markets.

Case Study:

Participants will be required to:- (a) calculate how to derive the key elements of the various covenants (b) identify some of the more problematic components in the covenants (c) calculate the various covenants and (d) explain the pros and cons of each of the covenants and why they may be appropriate for one deal but not another. The calculations are relatively simple and are designed to explain the basic principles and reinforce learning.


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5-6 participants – 20% discount,7-8 participants – 25% discount,Over 9 participants – 30% discount


18 January 2019, 1 July 2019, 19 November 2019