Resolution #8: We Will Finance Our Business More Effectively
January 13th, 2010 | Posted by SunTrust Bank
By Timothy J. Duggan, Senior Vice President, SunTrust Bank Technology & Government Division
Managing Loan Covenants – Some Best Practices to Consider
Loan covenants are often an important part of your Bank’s credit agreement. While at one level covenants may seem to be a nuisance, they are frequently a necessary part of the deal that delivers to you inexpensive and relatively flexible access to debt capital. Rather than thinking of them as a nuisance, negotiating covenants can be used to your advantage to build a better relationship with your bank by helping the bank to develop a deeper understanding of your business objectives. For this reason it pays to give some thought to how to manage them from creation through monitoring, reporting and of course compliance.
When negotiating your credit agreement, keep in mind that most bankers use covenants not as litmus tests but as road markers on the path you originally projected your business to take. Take the time to be sure your banker knows what your business objectives are and how the requested credit facilities will help you achieve them. Discuss variables that could impact your Profit & Loss statement and balance sheet during the life of the facility, as well as any resulting impact on covenant levels (sensitivity analysis). Against this background, work proactively with your banker to develop covenants that make sense to both of you (reasonable and achievable for you, meaningful as a risk management tool for the bank). Ask your banker questions: Which covenants are most important to the bank? Why? How would the bank react to a covenant violation? The idea is to create a framework of understanding by both parties about what is important, what variables could affect covenant compliance, and try to develop an understanding of what reactions to expect.
Once the deal is in place you owe it to yourselves to keep track of your actual performance versus the covenants, and to keep current in your covenant compliance reporting to the bank (bankers get worried if a client goes dark and stops reporting). If your business changes during the term of the credit agreement, threatening your ability to comply with covenants set when the deal was closed, bring the issue to the bank as soon as possible. No one likes last minute surprises, and your bank is sure to react differently if you bring the issue to their attention sooner rather than later. Certainly few banks are likely to respond well to a sudden and perilous decline in your financial risk profile. However, in most cases bankers simply want to understand what has changed in your business and use covenants as a means to formally drive that dialogue. Assuming the change has not resulted in a material adverse affect on your risk profile you are likely to find your bank very willing to amend your deal and recast the covenants.
Covenants are clearly part of your path towards gaining access to inexpensive debt capital. They also can be part of the path towards building a better and stronger relationship with your bank, so take a pro-active stance in negotiating and managing them from the beginning and through the life of your credit agreement.
Timothy J. Duggan, Senior Vice President
SunTrust Bank Technology & Government Division
8330 Boone Boulevard, Suite 700
Vienna, VA 22182
Office: 703 442-1596
timothy.duggan@suntrust.com
Live Solid. Bank Solid.
This entry was posted on Wednesday, January 13th, 2010 at 1:00 am and is filed under New Year's Resolutions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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