Understanding Financial Covenants

Euromoney Learning Solutions

How long?

  • 3 days
  • online

What are the topics?

Euromoney Learning Solutions

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About the course

This course will be run using video conferencing technology. To find out more, please contact learning@euromoney.com

It is is designed to explain financial covenants in loan agreements to those who do not have a background in financial analysis. It aims to demystify the financial ratios and give you confidence to approach these provisions and to appreciate some of the important commercial issues which they give rise to. The course starts with an overview of the ratios, and then takes you step by step through the various concepts used in them, starting from first principles and with plenty of simple examples and exercises, so as to provide a thorough understanding of the common elements of each of the financial covenants discussed and of the commercial impact of these provisions.

The course consists of a mix of short tutor led presentations, videos, online learning, exercises and feedback spread over the course of two days. The content delivery has been carefully designed to help delegates get to grips with the subject at their own pace, whatever their level of prior knowledge, but within a set time framework and with the support of the tutor. No prior knowledge of company accounts is required but those who do not have a financial background are likely to find that the self paced parts of the course may take them longer than indicated in the course description The course includes material covering some key topics in the loan agreement (such as the concepts of “Default”, cross default and material adverse change) so that during the course you will be able to understand the commercial implications of the financial covenants in the context of the loan agreement as a whole.

By attending this course, you will

  • appreciate the importance of the financial ratios for keeping lenders informed and reducing risk
  • be able to read definitions of
    • Borrowings
    • Cashflow
    • Debt Service
    • EBITDA
    • Excess Cashflow
    • Finance Charges
    • Net Debt and
    • Working Capital

in the financial covenants and understand the key features of those definitions

  • Appreciate the importance of timing issues and information undertakings when reviewing the ratios
  • Appreciate the interaction between the financial ratios and the other provisions of the loan agreement such as the material adverse change clause and the cross default clause
  • Appreciate the difference between incurrence tests and maintenance tests
  • Spot when definitions of EBITDA are particularly borrower friendly or lender friendly
  • Understand what Cashflow is, how it differs from EBITDA and why it matters
  • Understand the difference between the interest cover ratio and the cashflow cover ratio
  • Describe the leverage ratio and why it is used

Prercourse material - Introduction to Financial Covenants - self paced interactive online tutorial

  • Why do we use financial ratios?
  • What ratios do we measure?
  • When are the ratios tested?
  • Who do the ratios relate to?
  • How do we get the information to test the ratios?

Agenda

Day 1 - Introduction and EBITDA

Session 1

  • Introduction to financial covenants – why, what, when, who, and how?
  • What is EBITDA?

Self paced

  • self paced Interactive online EBITDA tutorial
    • What is it?
    • Differences between EBITDA and profit measured in the company accounts
    • How is it calculated?
    • Where do we get the information?
    • Treatment of subsidiaries and associates
    • Income and expenses from unusual items
    • Drafting issues
  • Workshop – spot the problems with the drafting of EBITDA

Session 2 – questions and feedback on workshop

Day 2 - Leverage. Interest cover and loan agreement issues

Session 1 - Introduction to Leverage and Interest Cover

Self paced Interactive online tutorial and exercises

  • Leverage
    • What is it
    • When is it tested
    • Ltm EBITDA
    • How do we find the numbers
    • Incurrence ratios
    • Timing issues
    • Total debt
    • Definition of Borrowings
    • Deductions to reach net debt
  • Interest Cover Ratio
    • What is it and why?
    • Definition of “Finance Charges” and common discussion points
  • Workshop
    • Review different types of financial covenants and the drafting appropriate to each of them

Session 2 - Feedback and Key issues in the Loan Agreement

  • Homework Interactive online tutorial
    • Default and Event of Default
    • Cross default and cross acceleration
    • material adverse change and financial ratios
    • Equity cure rights
    • Obligors and guarantor coverage requirements

Day 3 - Cashflow

Session 1 - Introduction to Cashflow

Self paced Interactive online tutorial and exercises

  • Cashflow and Excess Cashflow
  • What is Cashflow and why does it matter? We build up to a review of the definition of Cashflow by first explaining these issues, step by step, starting from first principles
    • How does cashflow differ from profit?
    • What adjustments are made to net operating income to get to cashflow and why?
    • The impact of the accruals principle and the matching principle
    • Adjustment for changes in working capital
    • Treatment of cash in calculating working capital
    • What adjustments are made to EBITDA to get to cashflow and why?
  • The cashflow cover ratio
  • Prepayment out of Excess Cashflow
  • Debt Service and the treatment of Mandatory Prepayments
  • Relationship between the definitions of Cashflow, Excess Cashflow and Debt Service
  • Workshop
    • When does a Default and an Event of Default occur?

Session 2 - questions and feedback on workshop

Experts

Sue Wright

Sue Wright is a solicitor with over 18 years experience in international banking transactions, including syndicated loans, subordinated debt, structured finance and tax driven transactions. She was a partner in the banking department at Norton Rose for 8 years and was responsible for training ass...

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Understanding Financial Covenants at Euromoney Learning Solutions

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