The Advanced Negotiation Issues in Financial Covenants Course

Date23 September
Times9:00 - 17:00
Cost£695.00 + VAT (£834.00)

financial covenants course

Financial Covenants Course Overview:


This programme covers financial covenants in Loan Agreements and includes specific reference and analysis of the terms and definitions as used in the LMA Senior Facilities Agreement for Leveraged transactions and covenants which appear in the LMA Real Estate precedents but consideration will also be given to current developments in the market particularly the larger syndicated (TLB-style) deals which no often include Springing Leverage covenants. The programme will also cover the typical covenants encountered in Infrastructure and Project Finance transactions

The loan market in Europe is bifurcating into two main approaches to loan documentation; smaller club and bilateral deals which broadly follow the more lender-friendly LMA approach and larger syndicated TLB-style deals which, increasingly, are being influenced by the high yield bond market and adopt a Cov-loose or Cov-lite approach where some deals now have only one or two financial covenants and occasionally none at all.

The larger syndicated TLBs also vary in approach with 2 slightly different approaches depending on whether they are English law or NY law (for example, the latter do not usually permit overcures or require prepayment of loans from equity cure cash).  Direct-alternative lenders also tend to adopt a more borrower-friendly approach to the terms in the loan and the financial covenants.

Financial covenants are arguably one of the most heavily negotiated aspects of the Loan Agreement. Too often some parties fail to understand the key issues that really matter, for example, they view the financial covenants in isolation rather than appreciating they must be seen in the context of each particular capital structure. A second pitfall is to spend too much time on which covenants apply rather than focusing on the key constituents of the key terms in the financial covenant.

This course provides a detailed look at commercial aspects of financial covenants and looks under the bonnet at the critical issues that arise in practice. This course provides an in-depth look at the covenants as set out in the Loan Market Association precedent together with other covenants that might be used in practice. Reference is made to the Debtxplained loan Database which tracks key terms in the larger syndicated deals.

Participants will gain an in-depth view of which covenants should be used and why together with a detailed analysis of the constituents of the covenants and the sponsor friendly add-backs and other sponsor friendly techniques used by borrowers to manipulate the covenants.

Following the release of the LMA precedent on Real Estate investment transactions, the course now includes a section on financial covenants in real estate deals. On close examination there are some significant differences between of the interest cover ratio in real estate deals and in leveraged transactions.

The programme will appeal to practitioners involved in leverage, real estate and infrastructure, such as Lawyers, Private Equity professionals, Bankers in Lending (all departments), Corporate financiers, M&A advisors, Debt advisory and Restructuring. Accounting professionals looking to expand their knowledge of this topic will also benefit as many of the issues embrace legal /documentary considerations. The programme adopts a pan-European approach to the topic but the presenter is able to discuss issues relevant in the USA in view of his exposure to those markets.

To derive full benefit from the programme, it is essential that attendees have a basic understanding of the main / headline elements of a Profit and Loss account (Sales, EBITDA, EBIT etc) and a basic understanding of the differences between P&L /Accrual Accounting on the one hand and Cash accounting on the other. A short module summarising the key differences of these two approaches is available on request prior to the programme. It is to be emphasised that participants DO NOT require an understanding of IFRS or GAAP as the programme is designed to enable attendees to have enough basic knowledge to identify the key commercial issues.

Case Study:

Participants will be required to:- (a) calculate how to derive the key elements of the various covenants (b) identify some of the more problematic components in the covenants (c) calculate the various covenants and (d) explain the pros and cons of each of the covenants and why they may be appropriate for one deal but not another. The calculations are relatively simple and are designed to explain the basic principles and reinforce learning. Accounting knowledge is not required but would be helpful.

financial covenants training

Financial Covenants Course Content:


Introduction – Interaction of capital structure & financial covenants

  • Types of instruments & impact on the financial covenants
  • Impact of Capital Structure on Financial Covenants.
    • Bullet loans
    • Impact of PIK
  • Current market trends – Cov-lose and cov-lite review

Key financial ratios used by Lenders and typical LMA ratios

  • Market based financial ratios
  • The four LMA covenants in leveraged deals
  • Leverage ratios (Balance sheet and P&L ratios)
    • Total Debt / EBITDA
    • Senior Debt/ EBITDA
  • Interest coverage ratios
    • EBITDA / Total interest
    • EBITDA / Senior Interest
    • EBITDA / Cash interest
    • [EBITDA – Maintenance Capex] / Cash Interest
    • [EBITDA – Capex] / Cash Interest
  • Cash flow cover (DSCR)
    • CADS / Total Debt Service
    • CADS / Senior Debt service
  • Capex covenant
    • Baskets – LMA vs Market approach
    • Carry forward / carry back amounts – LMA vs Market approach
    • Add-backs – LMA vs Market

A closer look at the key elements of the ratios per LMA and market approach

  • EBITDA (note: is a defined term in the Loan Agreement, it is not a GAAP or IFRS term)
    • Simplistic calculation of EBITDA
    • Consistency of application (dealing with Accounting changes under IFRS, GAAP etc)
    • Exceptional items – LMA approach, UK GAAP vs IFRS
    • Sponsor friendly add-backs
    • Discontinued Operations – LMA, different approaches of UK GAAP vs IFRS
    • Derivative & Financial Instruments – UK GAAP vs IFRS
    • Pension Items – UK GAAP vs IFRS
  • Total [Net] Debt and Senior Total [Net] Debt
    • “Borrowings” per the LMA
    • Simplistic calculation of Net Debt
    • Example of net debt items
    • Treatment of PE “Debt” and Vendor Loans
    • Impact of Debt Buybacks and impact on “Debt”
    • Treatment of “trapped” cash on Debt
  • Finance charges & Net Finance Charges
    • Tricky issues
  • Financial Indebtedness & impact on the covenants
  • Topical matters affecting the covenants
    • Impact of Leasing on EBITDA (Operating vs Finance Leases)
    • Forthcoming changes in IFRS & impact on covenants
    • Capitalising costs
    • Forex gains/losses on Intra-group transactions
    • Debt buy-back gains & impact on EBITDA
    • Restructuring costs
    • Exceptional, extraordinary items & other “one-off”, non-recurring items
    • Related party income

Current market trends

  • Key differences between large vs mid cap vs smaller deals
  • Cov-lose –
    • What it covers
    • typical ratios used
  •  Cov-lite
    • What it covers,
    • typical ratios used
  • Springing Leverage covenants
    • When should the ratio spring
    • Calculating the constituents
    • When is the covenant tested
    • Problem areas

Other considerations

  • How many covenants are needed
  • Which companies should be included
    • Definition of “Group”
    • Adjusted EBITDA (effect of acquisitions & disposals)
  • Dealing with “Short” periods (i.e. Less than 12 months post the deal)
    • Periods shorter than 12 months
    • Typical pitfalls to avoid
  • Frequency of application: When should the ratios be tested
    • Historic TTM/LTM, forecast, both (quarterly, monthly)
    • 2 options per LMA
    • What level of “Headroom” is appropriate
    • Impact of Clean-ups
  • Additional role of the financial covenants on the deal
    • Margin ratchets
    • Guarantor Coverage Test
    • Cash sweeps re distributions and disposals
  • The Compliance Certificate
    • Requirements per LMA Sch 9
    • Current commercial requirements
    • When does the breach occur
    • Ramifications of the breach for Lender (traps to avoid)
  • Equity cures
    • Equity cures – What are they, good or bad
    • What should be cured (EBITDA, Cashflow, Debt)
    • Treatment of “overcures”
    • Is the cure EBITDA? And if yes what effect will this have
    • How should the cash be used? (Why repayment of debt is not appropriate)
    • Deemed cures – what are they and are they worth having?
    • Review of recent topical case law lessons from Ideal Standard

Covenants used in Real Estate deals

  • The LMA financial covenants
  • Interest cover – constituents, pros and cons
    • Historical
    •  Projected
  • Key differences from the leveraged ratio
    • Calculation periods
    • Passing Rental” – what is included and what is excluded
    • Difficult / contentious aspects – break clauses, non-rental income, costs/expenses
    • Finance costs” – treatment of hedging
  • Loan to Value – constituents, pros and cons
    • Items to be netted off
  • Loan to Cost – constituents, pros and cons

 Project finance / Infrastructure

  • Annual Debt Service Coverage ratio (“ADSCR”)
    • Historic vs projected test
    • Definition of cash
    • Definition of Debt service
    • Typical ratios in key sectors for covenant breach
    • Treatment of accruals/forward sales/options/hedging
    • Use and application of the ADSCR
      • Distribution lockup thresholds, drawdowns, EODs
  • Loan/Bond Life cover
    • Definition of CADS
    • Treatment of cash balances (what about swaps)
    • Treatment of reserve accounts
    • Using the correct Discount rate
    • Dealing with multiple types of debt
    • Typical ratios in key sectors
    • Pros and cons
  • Project Life cover
    • Differences to Loan life cover
    • Tricky issues
  • Using the Buffer test

What Redcliffe’s clients are saying about the course

“An excellent use of case studies & indication of recent trends” 

“A good mixture of the sponsor, lender, legal & accountancy perspectives” 

“The trainer is clearly very experienced with good market insight which was used to make links to the materials & content” 

“Good comprehensive overview of subject” 

“Strong use of practical examples to illustrate points” 

“Got a view into the top end of market”

“Up to date market information with enthusiastic and knowledgeable trainer.
Clear and useful explanation as to how various components
involved in financial covenants relate to each other”

“Constant Reference to Recent Market Developments and Transactions”

“Encapsulating the Key issues likely to be faced in Negotiation with Sponsors & Borrowers”

Delivering this course in-house for you to a number of participants could be very cost effective. Please call us on 020 7387 4484 to discuss this further.

If you have any questions about this seminar please write to us at

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Course Cost

£695.00 + VAT

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If you book and confirm multiple participants for this course in one order, we can offer you the following discounts:

  • 1-2 participants - full price
  • 3-4 participants - 15% discount
  • 5-6 participants - 20% discount
  • 7-8 participants - 25% discount
  • Over 9 participants - 30% discount