Advanced Negotiation Issues in Financial Covenants

£725.00 +VAT

This course can also be presented face to face in-house or via live in-house webinar.

Financial Covenants Course Objectives:

Participants will:

  • Be introduced to the interaction of capital structure & financial covenants
  • Master the key financial ratios used by lenders and appreciate typical LMA ratios
  • Have explained to them the key elements of the ratios per LMA and market approach
  • Work through calculations of EBITDA and cash flow and learn about factors that can affect the numbers
  • Get to grips with the issues influencing the calculation of debt for the purpose of financial covenants
  • Gain an understanding of the current market trends affecting EBITDA
  • Review the problem areas in finance and operating leases
  • Master the correct application of financial covenants and the use of equity cures
  • Be taught about the covenants that are used in real estate deals
  • Learn about the draft ECB Guidance on Leveraged Transactions

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 affacting EBITDA (aggressive add-backs)
    • Anticipated synergies and cost reductions
    • What are the “typical” requirments for “anticipated synergies”
    • Business optimisation expenses
    • Run-rate EBITDA – how is this calculated
  • Definition of “Cash flow”
    • 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 particlar problems with operating leases

Current market trends

  • Key differences between large vs mid cap vs smaller deals
  • Cov-lose
    • 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 defintion of EBITDA
    • Material subsidiaries and their relvance
    • Guarantor coverage test
  • Impact and relevance on Grower, Scalable and Builder baskets
    • Key differences
    • Impact on and relevance to the loan facility

Draft ECB Guidance on Leveraged Transactions

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

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

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.

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:

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 Financial Covenants Course 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.

An in-depth analysis of financial covenants used in leveraged and real estate loans

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


24 September 2018, 18 January 2019, 1 July 2019, 19 November 2019