CFI CBCA Loan Covenants Study Guide
Exam Fully Solved.
Loan Covenants Learning Objectives - Answer Understand the key concepts of covenants in a
loan agreement
Explain different types of loan covenants
Calculate key financial covenant metrics
Use a financial model in Excel to model financial covenants
A covenant is a - Answer clause in a loan agreement which can:
• Require a borrower to do a certain thing
• Restrain a borrower from doing a certain thing
Covenants are set based on: - Answer Business Risk
• Management experience
• Complexity of client operations
Security Available
• Physical assets
• Working capital
Financial Position
• Strengths of the assets and profitability
Term of the Loan
• Time to maturity
The purpose of loan covenants are to ensure that - Answer the lender's rights are secured and
there is a clear illustration of events leading to the borrower's default.
For Lenders
, • Get clear expectations from the lenders
• Reduce the costs of borrowing
Positive vs negative covenants - Answer positive - what they must do
-Must provide annually audited financial statements
-Must provide specific financial information such as aged receivable analysis
-Must achieve a certain threshold in certain financial ratios
-Must ensure facilities and factories are in good working condition
-Must perform regular maintenance of capital assets
-Must provide management accounts
negative - what they can't do
-Cannot change business ownership
-Cannot sell assets without corresponding loan repayments
-Cannot enter certain types of leases
-Cannot issue debt more senior than the current debt -Cannot exceed certain dividend limits
-Cannot partake in certain M&A
Financial vs non-financial covenants - Answer Financial Covenants
Focus on the borrower's financial position
-Maintain a debt to equity ratio within certain thresholds
-Maintain a minimum interest coverage ratio
-Maintain a minimum tangible net worth
-Maintain a minimum debt service coverage ratio
-Maintain a minimum current ratio
-Maintain a minimum fixed charge coverage ratio
VS
Non-Financial Covenants
Focus on the non-financial business drivers
-Key cash flow drivers should be sustained
Exam Fully Solved.
Loan Covenants Learning Objectives - Answer Understand the key concepts of covenants in a
loan agreement
Explain different types of loan covenants
Calculate key financial covenant metrics
Use a financial model in Excel to model financial covenants
A covenant is a - Answer clause in a loan agreement which can:
• Require a borrower to do a certain thing
• Restrain a borrower from doing a certain thing
Covenants are set based on: - Answer Business Risk
• Management experience
• Complexity of client operations
Security Available
• Physical assets
• Working capital
Financial Position
• Strengths of the assets and profitability
Term of the Loan
• Time to maturity
The purpose of loan covenants are to ensure that - Answer the lender's rights are secured and
there is a clear illustration of events leading to the borrower's default.
For Lenders
, • Get clear expectations from the lenders
• Reduce the costs of borrowing
Positive vs negative covenants - Answer positive - what they must do
-Must provide annually audited financial statements
-Must provide specific financial information such as aged receivable analysis
-Must achieve a certain threshold in certain financial ratios
-Must ensure facilities and factories are in good working condition
-Must perform regular maintenance of capital assets
-Must provide management accounts
negative - what they can't do
-Cannot change business ownership
-Cannot sell assets without corresponding loan repayments
-Cannot enter certain types of leases
-Cannot issue debt more senior than the current debt -Cannot exceed certain dividend limits
-Cannot partake in certain M&A
Financial vs non-financial covenants - Answer Financial Covenants
Focus on the borrower's financial position
-Maintain a debt to equity ratio within certain thresholds
-Maintain a minimum interest coverage ratio
-Maintain a minimum tangible net worth
-Maintain a minimum debt service coverage ratio
-Maintain a minimum current ratio
-Maintain a minimum fixed charge coverage ratio
VS
Non-Financial Covenants
Focus on the non-financial business drivers
-Key cash flow drivers should be sustained
