Does someone have a list of bank covenants they are willing to share?

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January 17, 2021

by a searcher from Harvard University - Harvard Business School in Fort Wayne, IN, USA

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Reply by a searcher
from Washington University in St. Louis in Denver, CO, USA
The two most common are i) Total Gross/Net Leverage (if two tranches of debt then it may be broken into both Senior/Total that are tied together) and ii) fixed charge coverage ratio. That said, the other two I have seen depending on the situation/lender/type of business are iii) capital expenditures (a fixed $ amount in each given period) and iv) min liquidity (i.e. min cash balance) which is perpetual - sometimes the lender will allow you to include unused revolver availability in the definition but sometimes it is just cash balance. For the latter two, ask why the lender is insistent on including them and I would definitely push back if you can. #3 (capex) is implicitly included in the calculation of the FCCR (and in the FCCR calculation you benefit/give yourself more room if the business is generating more EBITDA than you expect) whereas with #3, the lender is just including an additional element of conservatism to make sure that more EBITDA translates into more liquidity in the business (that they have security over) vs. it just being turned around and spent on more capex. For #4, be wary what the actual net usable proceeds are for the loan if the min cash balance is high.

A couple of other thoughts - be very clear in the credit agreement with your definitions, the periods they are referencing, and how EBITDA/operating cash flow is defined and be very conservative with your business's forecast for covenant negotiation purposes (i.e. if you have an upside case and a lesser growth case, come up with a flat/conservative case and use that) as the last thing you want is to be sweating covenant levels each quarter rather than focusing on growing the business. In other words, you may want two versions of your model (the 'slam dunk' case and the upside case).

Parting tip, for FCCR mathematically you will be better off if you put as many items in the numerator (Operating Cash Flow) as you can as compared to the denominator (Fixed Charges, incl. Amortization, Taxes, etc.) - do a quick example with static numbers for the key inputs and you'll see why. If you want to discuss any of this further feel free to shoot me a message.
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Reply by a lender
from California State University, Sacramento in Seattle, WA, USA
Good comments so far on usually including an EBITDA turn max for SR and TOTAL debt and min FCCR. The specifics of the actual covenants could also depend on many other factors such as liquidity and investment thesis impacts to cashflow and balance sheet. There are both financial and non-financial covenants. We customize covenants to optimize the servicing experience per the operating realities of each conventional deal we do.
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