14-3 Bond Covenants

14-3 Bond Covenants - The Art of the Covenant: Everything...

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The Art of the Covenant: Everything you Need to Know about Loan Covenants. Source: Jill Andresky Fraser, 1 August 1997 Two years ago Allen Systems Group Inc., a com- puter-software manufacturer based in Naples, Fla., was almost ready to sign a new credit agreement. But its chief financial officer, Frederick Roberts, was concerned about an essential yet often-overlooked component of the deal: the loan covenants. "Our banker wanted to include some very strict cove- nants regarding the company's key financial ratios," Roberts recalls. Those covenants "would have wound up hampering our ability to grow, because they would have prevented us from acquiring some impor- tant new software products. Each acquisition would have put us temporarily out of compliance." Roberts was determined to negotiate the $23-million company's way out of those requirements--or seek financing elsewhere. "Too many entrepreneurs get ecstatic just over the act of qualifying for bank fund- ing--but then fail to pay attention to the fine print of the loan agreement," he says. "If you're not watching and you fall out of compliance with a covenant, you run a very powerful risk of getting your loan called in, whether you're up-to-date on your payments or not." Loan-covenant problems are fairly common for fast- growing companies, whose financial statements sel- dom conform to a banker's ideal vision of fiscal health. Roberts, armed with short- and long-term fi- nancial projections, eventually won "more appropri- ate" terms, as he puts it. But many other companies either don't try to change their bank covenants or don't worry about future problems those covenants might pose. Would your own approach have been simply to sign up, close the loan, and hope for the best? Then it's time for Inc.'s quick primer on loan covenants. Don't visit your banker without it. MYTH: With bank financing, all that matters is the interest rate. REALITY: Many banking experts believe that inter- est charges are among the least important features of a loan. "After all, interest is a deductible business expense, so the government is really helping you handle it," notes George M. Dawson, a banking con- sultant based in San Antonio, Tex. Loan covenants, on the other hand, are extremely
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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14-3 Bond Covenants - The Art of the Covenant: Everything...

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