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Posts Tagged ‘Covenants’
Tuesday, November 22nd, 2011 by Ron Carleton
We’ve been running a poll on the Comments on Credit blog for the past few months asking 2 questions:
It is no surprise that bankers like the debt service coverage and fixed charge coverage ratios best – they are good measures of a company’s ability to pay its financial obligations as they come due (without relying on external financing). We think they are the best ratios to measure a company’s liquidity (much better than the current and quick ratios, but that is a topic for another post).
If debt service coverage and fixed charge are the best measures of coverage (and liquidity), the real question is why we don’t use them more often in covenants? The most used coverage covenant (in our survey and in our experience) is EBITDA coverage.
Accuracy vs. Simplicity
Whenever we look at ratios, for analytical purposes or for covenants, there are always the conflicting goals of accuracy and simplicity. We could write a ratio that looks at a company’s internally generated cash flow (say, free cash flow) relative to all of its future, normalized financial and operating cash outflows, but by the time we write the definition into a credit agreement it would be too long and cumbersome. As it is, we’ve see fixed charge coverage definitions that exceed one full page of (very small) text. And even then, there may be disagreements between borrower and lender about how it should be calculated.
So, in order to make the numbers easy to calculate and avoid disputes in the future, we sometimes go with simpler covenants, even if they are not the best measures of a company’s risk. Thus, EBITDA coverage is used more often than debt service coverage.
Tags: Covenants, debt structure, Liquidity
Posted in Uncategorized | 13 Comments »
Wednesday, March 16th, 2011 by Ron Carleton
We welcome your comments and questions. Here’s a question from one of our readers:
“I frequently come across credits that have a substantial amount of non-cash interest expense related to hybrid financial instruments. Specifically, the one I have in mind has subordinated mezzanine financing with warrants attached. Embedded in the company’s interest expense is “change in fair value of warrant liability” and “amortization of discount and issuance costs on notes payable”.
In a few of your recent articles (Comments on Credit and RMA) there is some mention of this kind of debt in relation to subordination agreements etc., but I cannot find a good explanation of how to calculate debt service coverage ratios on firms that have these kinds of instruments.
We frequently syndicate our transactions with other traditional commercial banks and in their analysis I’m finding that they don’t exclude non-cash interest expense like this out of their debt service calculations. Some of the banks are more sophisticated than others, but I get the feeling that a lot of them don’t frequently deal with companies like this.
Can you provide any clarity on how one should debt service in a company like this? I can see cases for both excluding and including the expense, but would really like to get your perspective and see if there is something I’m missing.”
Here’s our response:
The two non-cash items that we see most often included in interest expense on a company’s income statement are:
1) Amortization of discount and issuance costs (sometimes called deferred or capitalized financing fees) – very common, but typically very small
2) Accrued and capitalized interest on zero coupon debt or “payment in kind” (or “PIK”) debt – not very common, but sometimes used by higher risk companies
Mezzanine debt is typically used by high-risk, middle market and smaller companies. The total return expected by mezzanine investors is in the mid to high teens. Since borrowers typically can’t afford to pay that much cash interest, mezzanine debt includes other non-cash compensation, including original issue discount (”OID”), PIK interest, and equity warrants. The cost of these items (cash or not) must be included in interest expense in each year. They typically are not broken out on the income statement, but should be detailed in the footnotes.
Now to your question. Non-investment grade and middle-market borrowers typically have a coverage covenant in their bank debt. It may be:
- EBITDA coverage: EBITDA / Interest
- Debt Service Coverage: EBITDA / (Interest + Scheduled Principal Payments)
- Fixed Charge Coverage: EBITDAR / (Interest + Scheduled Principal Payments + Rent + Dividends + Capex)
Most often, the interest part of this formula is interest expense, right off of the income statement (i.e. including any non-cash interest amounts). However, as with any type of ratio analysis, covenant formulas should be adjusted to fit the unique characteristics of each borrower. For example, retailers with lots of rent expense typically use EBITDAR Coverage (i.e. EBITDAR / Interest + Rent) instead of EBITDA Coverage.
If a company has a lot of non-cash interest, we recommend (and often see) the coverage ratios adjusted to include only cash interest expense (i.e. excluding amortization of issuance costs, capitalized interest, etc.). Here’s why: we see coverage as a measure of liquidity – will the company have enough cash to pay its short-term financial obligations? As such, the closer you can get to cash measures, the better.
Of course, EBITDA isn’t really a cash measure, but that’s a topic for another day …
Tags: Cash Flow, Covenants
Posted in Uncategorized | 4 Comments »
Tuesday, December 28th, 2010 by Ron Carleton
Here’s our list of the top 10 topics on the minds of credit professionals in 2010:
10) Risk Management – We’ve written many times this year about risk management, both good and bad. Whether it was BP and operational risk, suppliers dealing with customer concentration risk (or “Wal-Mart Risk”), or Lehman just not managing risk. This topic was on our radar in 2010 (and needs to stay there into 2011 and beyond).
9) Games CFOs Play – Aggressive financial reporting (and outright fraud) can happen at any time, but management’s motivation to do it is heightened during an economic downturn when there is pressure to “hit the numbers” (and not breach covenants, etc.).
8 ) Managing High Risk Clients – Sure the recession is over, but many companies are still struggling with high leverage, high competition, low sales growth, and high costs. Lenders and bondholders will be working with many “high risk” clients well into 2011.
7) Intercreditor Priority – When times are good (think the 2003-07 credit bubble), no one pays much attention to collateral and subordination (or covenants, or any other part of credit documentation for that matter). The restructurings and bankruptcies of the great recession reminded us how important these issues are. We fear that the market is already starting to forget these lessons (think covenant lite and second lien!).
6) Cash Flow Analysis – Cash is king. Real cash, not EBITDA. Enough said.
5) Liquidity – Many CFOs (and lenders) have learned the hard way that liquidity can be the most important element of financial strategy. Our favorite analytical tool for looking at liquidity is the liquidity position.
4) Financial Strategy - Leverage matters too. A company’s debt strategy should depend on its business needs and business risk, not just the condition of the capital markets. The levering up we saw in the boom is evidence that some companies forgot this rule – many have been working to delever since 2008.
3) The Credit Cycle - The debt markets have returned (although not to the levels of 2006-07, yet). The return hasn’t been smooth, however. Issuers and investors have been looking closely at the relationships between the loan and bond markets, perhaps venturing where they haven’t been before.
2) Investing in People – While bank compensation levels haven’t necessarily returned to 2006-07 level (or most), we certainly see a lot of hiring at the analyst and associate levels, and more business and opportunities for more senior professionals.
1) New Opportunities – With the economy (slowly) improving (think increasing loan demand), and bank capital on the mend (think increasing loan supply), we think the increasing bond and loan volumes we saw in the second half of 2010 will continue into 2011. Here’s hoping that 2011 brings you many new opportunities.
What “hot topics” do you see looking forward – leave a comment…
Tags: Cash Flow, Covenants, debt structure, Early Warning Signs, financial fraud, financial institutions, Financial Strategy, Leverage, Liquidity, Liquidity Position, Priority, Problem Credit, Risk Management
Posted in Uncategorized | 3 Comments »
Wednesday, May 26th, 2010 by Ron Carleton
For the 7th time in 10 years, Wal-Mart is #1 on the Fortune 500 list (in the other 3 years, it was #2). The company is the largest private employer in the U.S. and accounts for 8% of total retail sales in the US. As big box retailers (including Wal-Mart, Target, The Home Depot and others) have gained market share over their smaller competitors, consumer products companies feel the need to sell to these large retailers in order to grow sales. For some companies, however, selling to the big box retailers has a darker side – what we call “Wal-Mart Risk.”
Customer Concentration Risk
The risk is customer concentration – that a significant portion of a company’s sales are to one company. The dangers of customer concentration include:
1) Credit risk – the risk that the customer will go bankrupt and the company will be unable to collect its receivable.
2) Switching risk – the risk that the company will build capacity to satisfy a large customer, and then the customer switches to another supplier, leaving the company with significant excess capacity (and perhaps unsold inventory).
3) Buyer power – the risk that the customer uses its position as a large buyer to drive down the price it pays the company for goods.
In order to address customer concentration risk, revolving credit agreements that include a borrowing base often exclude accounts receivable from customers above certain concentration limits (say 10% of total receivables). This provision significantly limits revolver availability for some borrowers and does not protect lenders from the main risks of customer concentration – switching risk and buyer power.
How is Wal-Mart Risk different?
How should we look at customer concentration risk differently when the large customer is Wal-Mart or one of the other big box retailers?
1) Credit risk is significantly reduced. It is unlikely that Wal-Mart will go bankrupt and not pay its suppliers.
2) Wal-Mart takes advantage of its buyer power more than most. The downside of selling to big box retailers is that they will demand lower prices, leaving their suppliers with lower margins. In addition, Wal-Mart is well known for setting other strict terms for its suppliers in terms of product quality, inventory levels, distribution and returns.
Can we “structure around” Wal-Mart risk?
So how should lenders address the ever-increasing Wal-Mart risk among their borrowers?
1) Waive concentration limits for receivables from high quality vendors, like Wal-Mart, but consider lower advance rates to account for the higher dilution likely from aggressive return and warranty claims.
2) Consider the impact of the loss of a large customer on the borrower. Does the company have a contingency plan? Will it be able to bring down costs and capacity to match lower sales?
3) Lower leverage! Companies with significant customer concentration have higher business risk than companies with a diverse customer base and should thus have a more conservative financial strategy – that means less debt.
Have you seen companies and/or their lenders address this risk? Tell us how – we welcome your comments.
Tags: CAPS, Competition, Covenants, debt structure, Financial Strategy, Leverage, Risk Management, Wal-Mart
Posted in Uncategorized | 2 Comments »
Monday, February 1st, 2010 by Ron Carleton
In our last post, we described how to compare the cost of a floating rate instrument, such as a loan, to the cost of a fixed rate instrument, such as a bond. For one company, Jarden Corporation, we showed that the bond’s cost is 50 basis points higher than the loan’s cost. Since both debt instruments were issued by the same borrower, shouldn’t they cost the same?
Corporate Finance 101
Whenever there is a difference in the cost or return of two financing instruments, corporate finance theory tells us to look to the risk differences between the two. This applies if you are looking at it from the perspective of the issuer or the investor. For this post, we will continue the Jarden example, comparing a loan and a bond for a non-investment grade issuer (note that the product terms, pricing, and risk characteristics for investment grade issuers are dramatically different).
 Investor: Risk vs. Return
As with Jarden, the yield on non-investment grade (i.e. “high yield”) bonds is typically higher than the yield on non-investment grade (i.e. “leveraged”) loans. This is because high yield bonds are more risky to own than leveraged loans, for these reasons:
- Priority: Loans to non-investment grade companies are typically senior and secured, while bonds to these same companies are typically subordinated and unsecured. Thus, in a bankruptcy, the loans should get repaid before the bonds.
- Maturity and Amortization: Corporate loans rarely come due beyond 6-7 years from issuance, whereas high yield bonds often mature in 10 years. In addition, bonds typically have “bullet” maturities (i.e. all the principal comes due at once), whereas loans often amortize (i.e. get repaid) over time. This longer maturity and lack of amortization make bonds more risky to own than loans.
- Covenants: Loans have more (and more restrictive) covenants than bonds. Thus, as a company’s operating performance begins to deteriorate, the loan will default long before the bond. This early default gives the loan holders the opportunity to re-negotiate and improve their position before bond holders can do so.
Thus, in order to accept the greater risk of owning a high yield bond, investors demand a higher return than what they would receive on a leveraged loan from the same company.
Issuer: Risk vs. Cost
As with Jarden, for non-investment grade issuers, bonds typically have a higher all-in-cost than loans. This is because bonds are less risky for issuers and provide issuers additional flexibility.
- Refinancing Risk: Companies are constantly faced with the risk that they will not be able to borrow money when they need it. If the need is for a new project or operations, we refer to it as funding risk; if the need is to repay maturing debt, we refer to it as refinancing risk. Companies can reduce their refinancing risk by issuing debt with longer maturities. The longest maturity typically available to a non-investment grade company is a 10-year high yield bond.
- Flexibility: Bonds place few restrictions on a borrower’s operations or financial performance when compared to the large number of restrictive covenants typical in loans to non-investment grade companies.
Thus, many companies are willing to pay a higher borrowing cost (and issue bonds) in order to achieve other objectives, specifically lower refinancing risk and greater flexibility.
Loan-Bond Relative Value
When investors compare the risk and return of related instruments, such as loans and bonds from the same issuer, it is called relative value analysis. In our Jarden example, a portfolio manager would focus on the yield difference of 50 basis points.
- If they think this additional return does not adequately compensate them for the additional risk of holding the bond, they will buy the loan.
- If, as was the case at the beginning of the credit crunch, the difference was several hundred basis points for many high-yield issuers, they would buy the bond.
Tags: CAPS, Covenants, debt structure, Financial Strategy, Flexibility, Interest Rate Swaps, Jarden, Priority, relative value, term loan b
Posted in Uncategorized | 3 Comments »
Tuesday, January 26th, 2010 by Ron Carleton
Jarden Corporation (Ticker JAH) is a diversified consumer products company whose brands include First Alert, Holmes, Mr. Coffee, and Sunbeam. On June 30, 2009, it had approximately $2.7 billion of debt outstanding, half of which was in the form of Term Loans due through 2012. Management was eager to begin refinancing these term loans in order to gain additional covenant flexibility and extend maturities. Over the next 7 months, it completed two transactions.
August 2009: “Amend and Extend”
- In August 2009, the company extended the maturity of $600 million of Term B loans (”TLBs”) from January 2012 to January 2015 through the creation of a “Term B4″ tranche. This new tranche was priced at LIBOR + 3.25%. The remaining $724 million of term loans remain due through 2012.
- Along with the TLB extension, the company extended the maturity of $100 million of its (unused) revolver from 2010 to 2012 and amended the covenants on its loan facilities to allow for additional securitization and other indebtedness.
January 2010: Senior Subordinated Notes
- In January 2010, the company completed an offering of 7.5% Senior Subordinated Notes due 2020. The offering consisted of two tranches: $275 million offered in the U.S. and EUR150 (approximately $217) offered in Europe.
- The company used a portion of the proceeds from this bond to repay a portion of its term loan, presumably those maturing through 2012.
- The U.S. tranche was priced at 99.139, for a yield of 7.625%, or a spread of 385 basis points over the 10-year treasury.
So which is cheaper?
With LIBOR at 0.25%, the cost of the loan is 3.5% (i.e. LIBOR + 3.25%), while the bond’s effective cost is 7.625%. So the loan is a cheaper source of capital than the bond? Not so fast! The loan is floating rate – if LIBOR goes up, the company’s interest cost will go up with it. The bond is fixed rate – no matter what happens to interest rates, the coupon on the bond will not change. So we cannot just compare the current loan cost of 3.5% to the bond’s cost of 7.625% – that would be comparing apples to oranges.
Combining a Loan and a Swap
In order to compare the cost of a fixed rate instrument (i.e. bond) to a floating rate instrument (i.e. loan), you must put them both on the same basis: either convert the bond to a floating rate or convert the loan to a fixed rate. This is done using an interest rate swap. Let’s swap the loan to a fixed rate, as follows:
Step 1: The company borrows at LIBOR + 325 basis points.
Step 2: In a separate transaction, the company agrees to make a periodic fixed rate payment to a bank, in exchange for which, the bank agrees to make a periodic LIBOR payment to the company.
The current quote for such an interest rate swap is about T+10:
- The company will pay the bank a fixed rate of 3.875%, or 10 basis points over the current 10-year treasury rate of 3.775%
- The bank will pay the company a floating rate of LIBOR, which will vary over the life of the contract.
These transactions can be expressed as follows:
We can now calculate the effective fixed rate cost of the loan-swap combination:
- Payment to loan holders: LIBOR+325 basis points
- Received from the swap bank: LIBOR
- Payment to swap bank: Treasury +10 basis points
The LIBOR received from the swap bank offsets the LIBOR paid to the loan holders. The net outflow from the company is the T+10 paid to the swap bank plus the 325 basis points paid to the loan holders, or T+335. The 10-year treasury is 3.775%, so the effective fixed rate cost of the loan-swap combination is 3.775% plus 335 basis points, or 7.125%.
Why is the bond more expensive? And why would the company issue the bond if it is more expensive than the loan? Watch the blog for answers to these questions.
Tags: Amend and Extend, CAPS, Covenants, debt structure, Financial Strategy, Interest Rate Swaps, Jarden, term loan b
Posted in Uncategorized | 1 Comment »
Thursday, October 29th, 2009 by Ron Carleton
The November 2009 issue of The RMA Journal, The Journal of Enterprise Risk Management, includes an article entitled “Using Subordination to Define Intercreditor Priority” by Ron Carleton and Tim Delaney of Financial Training Partners. The RMA Journal is published by the Risk Management Association, a leading organization of professional credit, market, and operational risk managers.
Today, with credit portfolios under growing stress, minimizing losses is more important than ever. “Using Subordination to Define Intercreditor Priority” explains the different types of subordination and how lenders can structure debt to protect themselves in case of a default. For a free copy of the article and more information on Financial Training Partners, visit this page.
Tags: Covenants, debt structure, Priority, Subordination
Posted in Uncategorized | No Comments »
Monday, October 19th, 2009 by Ron Carleton
In the last 6 months, we’ve seen a number of “amend and extend” transactions. Typically they involve:
- The extension of the maturity of a term loan and/or revolver (typically for syndicated, non-investment grade loans). This is only for lenders who agree to the extension (i.e. some lenders may keep the original maturity
- Increasing loan pricing for lenders who agree to extend (to reflect current market conditions and the higher credit risk of the borrower) and an amendment fee.
- Covenant relief for the borrower (reflecting operating performance below original the targets).
Why an Amend and Extend?
During normal economic times, a borrower would do a new syndication as the maturity date for an existing facility approaches. So why are we seeing amend and extend agreements rather than new facilities? Because many of these companies would have a hard time getting a new syndication done. The loan market is much more selective for high risk credits, and many of these companies have high leverage and weak cash flows.
Amend and Pretend?
It is clear why a borrower would want an amend and extend (despite the higher cost) – they get covenant relief and one or two more years to turn around the business and generate cash for debt repayment. But why are lenders agreeing to these transactions? Do they really believe the borrowers will be able to repay the loans 2 years later, or are they just deferring the day of reckoning – the day when the borrower will need to do a major financial restructuring (or even a bankruptcy) and the lenders will have to write down the value of the loans? Is it an “amend and extend” or “amend and pretend” (that the loan will actually be repaid some day)?
Tags: Amend and Extend, Covenants, debt structure, Lines Of Credit, Problem Credit, Turnaround
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Wednesday, June 24th, 2009 by Ron Carleton
According to Bloomberg.com, American Airlines is asking its lenders for a covenant waiver. A conference call was held on June 22 and responses are due by June 25. Why the rush? The covenant would be waived for the quarter ending June 30, so the company wants the amendment done before the end of the quarter.
As we have discussed in earlier entries, many companies are amending their credit agreements to reflect lower than expected operating performance driven by the recession. Airlines have been especially hard hit by the downturn, so the pressure on American’s covenants is no surprise. The interesting element of this amendment is the lending group – institutional investors.
Term Loan B
A Term Loan B (”TLB”) is a term loan structured for sale to institutional investors, such as collateralized debt obligations (CDOs) and prime rate mutual funds. Traditional term loans, called Term Loan A’s, are typically originated by and sold to banks. Here are the main differences between the two:
Negotiating Amendments with Institutional Investors
Amendments to corporate loan agreements happen all the time. When the lenders are banks (as is typical for revolvers and TLAs), the relationship between borrower and lender often goes back many years and may include other business, such as cash management or bond underwriting. As a result, banks are often willing to work with borrowers towards a long-term solution (i.e. banks are more willing to grant waivers). TLA banks are often referred to as “relationship lenders.”
Institutional investors are “transaction lenders” – their relationship with the borrower often goes no further than the individual loan. As a result, they are often less inclined than banks to grant waivers or agree to amendments.
American Airlines “Pays Up” for its Amendment
American’s proposal to its TLB lenders is to waive the fixed charge covenant this quarter and cut it through the loan’s maturity in 18 months. In exchange, the spread on the loan would go from 200bp over LIBOR to 400bp, and there would be a new LIBOR floor of 2.5%. This would immediately increase the interest rate on the $435 million loan by about 3.9%, increasing interest expense by over $16 million per year. In addition, the lenders would get a 75 basis point amendment fee, costing American over $3 million. These terms are not unusual in today’s market for “B” rated companies like American.
Tags: CAPS, Covenants, debt structure, term loan b
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Wednesday, June 17th, 2009 by Ron Carleton
With the weak economy, we are seeing more companies breach covenants in their loan agreements. Such a default typically gives lenders these right:
- Acceleration (i.e. “call the loan”) – declare the principal of the loan to be immediately due and payable. This typically would result in the bankruptcy of the borrower since they do not have the cash on hand to repay the loan.
- Foreclose on collateral – As with acceleration, this would result in the bankruptcy of the borrower.
- Stop funding unused revolver commitments. Banks will typically continue to allow some revolver borrowings because cutting off the revolver would often result in a bankruptcy.
After a covenant default, banks typically do not exercise their rights – they do not call the loan or foreclose on collateral, and they often allow the borrower to continue to borrower under the revolver. Banks know that these actions would result in bankruptcy, and it is in everyone’s interest to avoid bankruptcy.
So what really happens?
Most covenant defaults result in an amendment (or waiver) to the loan agreement. The financial covenants that were breached are loosened in order to get the borrower out of default. Ideally, the company and banks should see the covenant breach coming and work out an amendment before the default happens.
A good example of this is the recent amendment done by Actuant Corporation (ticker ATU), a diversified industrial company headquartered in Wisconsin. The company was forecasting deteriorating financial performance which could have breached covenants. Before the defaults happened, the company negotiated an amendment which increased its leverage covenant from 3.5x to 4.5x (with future step-downs) and reduced its fixed charge covenant covenant from 1.75x to 1.65x.
What do banks get in exchange?
In exchange for giving a borrower more room under its covenants, banks typically get one or more of the following:
- Increased pricing and/or a one-time fee – to compensate them for the increased risk,
- Additional collateral – to improve their loss in the event of a bankruptcy,
- Reduced exposure – if the company is able to reduce unused amounts on the revolver or repay a portion of the term loan,
- Additional covenants – to ensure that cash is used to repay debt (e.g. dividend and/or capex limitations) and to better monitor the company’s performance.
In the Actuant example, the banks received:
- An amendment fee and increased pricing (spread went from L+250 to L+375; commitment fee went from 40 to 50bp),
- Faster term loan amortization (from $1.5 million per quarter to $10 million), and
- Additional collateral.
Tags: CAPS, Covenants, debt structure, Turnaround
Posted in Uncategorized | No Comments »
Wednesday, March 25th, 2009 by Ron Carleton
Eddie Bauer did not have a good fourth quarter of 2008. Reflecting the worsening  economy, sales were down 5.7% compared to the forth quarter of 2007. Still, adjusted EBITDA for the full year 2008 was almost $53 million, up over 25% from 2007. As for liquidity, the company ended the year with over $60 million in the bank, zero drawn on its $150 million revolver, and with no principal payments due on its other debt (a $193 million term loan and $75 million in convertible notes) until 2014. What could go wrong?
Covenant Compliance
The company’s debt agreements contain covenants limiting certain activities and requiring the company to maintain certain ratios. The most restrictive covenants are in the term loan, which required (as of year-end 2008) senior leverage to be no greater than 5x EBITDA and fixed charge coverage to be at least 0.9x (as well as limiting capital expenditures, dividends, new debt, and new liens). As of December 31, 2008, the company was in compliance with its debt covenants.
Now For the Step-Down
On March 18, 2009, Eddie Bauer announced it is “seeking an amendment to the term loan agreement to provide covenant relief and flexibility to manage through a recessionary economy.” The problem is not that the company expects leverage to go above 5x or coverage to go below 0.9x; the problem is that the financial covenants in the term loan agreement step down. As of March 31, 2009, leverage must be at or below 4x, compared to the 5x requirement just 3 months earlier. The coverage requirement also increases, eventually hitting 1.1x in 2012. Why did the company and its banks, led by Goldman Sachs and JP Morgan, include these changing covenant levels in the loan agreement?
Covenants Should Reflect the Business Deal
Setting loan covenant levels is an art not a science. Ideally, covenants should reflect the shared expectations of the borrower and lenders. In the case of Eddie Bauer, the company and its banks clearly expected the retailer to improve cash flow and bring down leverage, and set the leverage and coverage covenants at levels that both sides thought were achievable. When a company’s performance is materially worse than both sides expected when they did the deal, there should be a covenant default.
What Happens After a Default?
Rarely does a covenant breach in a corporate loan agreement result in foreclosure or bankruptcy; usually the borrower and lenders agree on an amendment. The borrower gets looser covenants, but what do the lenders get? It varies, but the amendment can include more collateral for the lenders, higher interest rates, an amendment fee, and additional restrictions on the borrower, all intended to reduce the lenders’ risk and increase the return on the loan.
So far, Eddie Bauer has not reached agreement with its lenders, but the amendment under discussion includes an 8% amendment fee (with 5% of that deferred until 2014), warrants for almost 20% of the company’s stock, and a significantly higher interest rate. Quite a cost for failing to step up!
Tags: Covenants, debt structure
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