Financial covenants—principles

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Financial covenants—principles
  • What are financial covenants?
  • Why financial covenants are used
  • Selecting appropriate financial covenants
  • Getting started on financial covenants
  • Who is tested?
  • When are the tests applied?
  • What about incurrence covenants?
  • Finding the figures for the tests
  • Accounting principles and Brexit impact
  • More...

Financial covenants—principles

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marks the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see Practice Note: What does IP completion day mean for lending lawyers? [Archived].

This Practice Note:

  1. explains what financial covenants are and why they are used in commercial lending transactions

  2. how financial covenants are selected for a particular transaction

  3. key issues which arise in the context of all financial covenants, and

  4. what testing periods and compliance certificates are

Where appropriate, this Practice Note highlights relevant provisions in Precedent Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee and the Loan Market Association (LMA) recommended form of facility agreement for leverage acquisition finance transactions (senior/mezzanine) and the separate financial covenant provisions document which can be used with other facility agreements (the LMA leveraged facilities agreement) (available to LMA members on the LMA website).

The Association of Corporate Treasurers (ACT) Borrower’s Guide to the LMA’s Investment Grade Agreements (2017) and Borrower's Guide to the LMA Facilities Agreement for Leveraged Transactions (2008)

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