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Loan Covenants and the Impact on Credit Decisions

Loan Covenants and the Impact on Credit Decisions. Presented By: Karen Drennan, Drennan and Associates Molly Drennan, Northern Trust Bank June 7, 2012. Drennan and Associates. Loan Covenants. What is a Loan Covenant Why Do Banks Add Covenants to Loan Agreements Typical Covenants

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Loan Covenants and the Impact on Credit Decisions

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  1. Loan Covenants and the Impact on Credit Decisions Presented By: Karen Drennan, Drennan and Associates Molly Drennan, Northern Trust Bank June 7, 2012 Drennan and Associates

  2. Loan Covenants • What is a Loan Covenant • Why Do Banks Add Covenants to Loan Agreements • Typical Covenants • Typical Financial Ratios • How this impacts the Customer, Supplier, and the Bank. Drennan and Associates

  3. Loan Covenant Defined • A covenant is a condition(s) that the borrower must comply with to be within the terms of the loan agreement. • In most cases if the borrower is not within compliance the loan will be considered in default and the lender has the right to demand payment. • Generally there is some period of time that allows the borrower to cure the situation. Drennan and Associates

  4. Why Banks Add Covenants to Loans • Maintain Loan Quality • Keep Adequate Cash Flow • Preserve Equity • Improvement of known Capital Structure Weakness • To Keep and updated picture of the Financial Performance and Condition Drennan and Associates

  5. Typical Loan Covenants • Hazard Insurance • Key-Man Life Insurance • Payment of Taxes and Fees • Financial statements submitted according to the agreement. Asset loans are generally monthly. Less risky loans are generally quarterly. The information is submitted with the borrowing base certificate. • Borrower agrees to pay all expenses that could result in the assets being encumbered by a lien from the government (per these would take priority over they banks lien) Drennan and Associates

  6. Other Common Restrictions-need approval • Distributions or Dividends • Change in Management • Mergers and Acquisitions • Cross Corporate guarantees • Additional loans • Capital Spending • Expansion, opening new locations Drennan and Associates

  7. Typical Financial Ratios on the Borrowing Base Certificate • Interest Coverage Ratio • Maximum Total Debt to EBITDA Ratio • Minimum Quick Ratio, Current Ratio (liquidity) • Minimum Return on Assets, Return on Equity (profitability) • Minimum Equity, Minimum Working Capital, Maximum Debt to Net Worth (leverage) Drennan and Associates

  8. Case Studies • 2 Large Marine Accounts • 1 Mid Size Armor Account Drennan and Associates

  9. Questions ?????????????????????????? Drennan and Associates

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