Loan to value covenants
Produced in partnership with Alexander Pelopidas, James Walton of Rosling King LLP
Loan to value covenants

The following Restructuring & Insolvency practice note produced in partnership with Alexander Pelopidas, James Walton of Rosling King LLP provides comprehensive and up to date legal information covering:

  • Loan to value covenants
  • Key features of LTV covenants
  • Calling a default—considerations
  • Potential lines of attack where a breach of a LTV covenant is called
  • Remedying the breach
  • Effect of market recovery

Loan to value covenants

This Practice Note looks at:

  1. the key features of loan to value (LTV) covenants

  2. possible issues with calling an event of default based on a LTV covenant breach

  3. potential challenges to an event of default based on a LTV covenant breach

  4. remedying a LTV covenant breach, and

  5. the impact of the economy on LTV covenant breaches

LTV covenants are common forms of financial covenant which require the principal sum of an outstanding loan, when expressed as a percentage of the value of the security charged to a lender, to remain below a stipulated level during the term of that loan. While a lender relying on a breach of a LTV covenant to call an event of default has traditionally been seen as relatively uncontroversial, there are various issues to be aware of.

Key features of LTV covenants

The inclusion of a LTV covenant in a facility or credit agreement will mean that the indebtedness of the borrower, expressed as a percentage of the value of the asset(s) granted as security for that indebtedness (such figure being referred to as the ‘loan to value ratio’ (LTV ratio)), must not exceed a set percentage until the loan is discharged.

An example of a LTV covenant is as follows:

‘the Borrower shall procure that the amount of the Loan shall not at any time exceed 65% of the Market

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