This Practice Note provides an introductory guide to financial covenants (financial undertakings). It explains why financial covenants are used before discussing how financial covenants are set and tested. It then explains certain common financial covenants used in commercial finance transactions including: • minimum net worth test • gearing ratio • leverage ratio (or debt to equity ratio) • current ratio (or acid test ratio) • cashflow ratio • interest cover ratio, and • loan to value ratio Note that this Practice Note does not provide a detailed explanation of financial covenants on specialist transactions. However, the last section links out to further information on using financial covenants in various specialist transactions. Where appropriate, this Practice Note highlights relevant provisions in the Loan Market Association (LMA) senior multi-currency compounded rates/term rates term and revolving facilities agreement for leveraged acquisition finance transactions (the LMA leveraged facilities agreement) (available to LMA members on the LMA website). It should be noted that the LMA investment grade facility documentation does not contain financial covenants

STOP PRESS: The UK’s prospectus regime is currently based on the EU Prospectus Regulation, which was retained in UK law as the UK Prospectus Regulation. Following a review of the UK prospectus regime, the UK Prospectus Regulation will be replaced by the Public Offers and Admission to Trading Regulations 2024, with all detailed requirements relating to admission to trading to be covered in Financial Conduct Authority (FCA) admission rules. The FCA published its final rules on 15 July 2025. The new rules come into force on 19 January 2026. This Practice Note reflects the requirements of the UK Prospectus Regulation regime. What does this Practice Note cover? This Practice Note: • explains what financial services regulation means and why it is important to regulate the financial sector • highlights the regulatory regimes that lawyers should be aware of when advising on lending, debt issuance and derivatives transactions • provides a summary of the UK and EU financial services regulatory frameworks, and • sets out common regulatory issues that

What does this Practice Note cover? This Practice Note provides an introduction to high yield bonds. It looks at: • the investors in these instruments, such as institutional investors and funds • the reasons for investing in them, including their advantages as compared to loans (for example, higher potential returns) • the entities that issue these instruments, typically corporates with sub-investment grade credit ratings, and • an overview of the high yield bond market, including its size, key participants, and typical features What are high yield bonds? Bonds are capital markets instruments representing a form of debt security. For more information on capital markets and bond issues, see Practice Note: Key features of the debt capital markets. High yield bonds, also known as junk bonds or speculative grade bonds, are bonds that generally offer investors higher rates of return than other types of corporate bonds because they are deemed to be riskier investments. High yield bonds are bonds that typically have been rated as sub-investment grade (Ba1/BB+ and below) at issuance by one

This Practice Note was originally written by Paul Seal and is now maintained by LexisNexis®. This Practice Note aims to give a general introduction to the way in which the tax system works and how it relates to income. It does not cover all the intricacies of the UK income tax system. Matters are covered in a broad approach and this Practice Note does not deal with employment taxes nor share incentives. For further general information, see the Income tax subtopic and for income tax rates and allowances applicable in the current tax year, see Practice Note: Key UK tax rates, thresholds and allowances for Private Client. Income tax is charged on particular individuals on certain categories of income, allocated between tax years to determine the rates payable. The tax year The tax year or year of assessment is the period from 6 April to 5 April and a particular tax year is described by stating the calendar year in which in starts and the calendar year in which it ends, so the tax year which

One way for banks and other financial institutions to generate revenue is by charging interest on the loans they make. This Practice Note explains: • what is meant by a bank’s ‘cost of lending’ • the differences between fixed and floating rates of interest • how floating interest rates are calculated, including information on SONIA and LIBOR • what is meant by reference rate floors and zero floors, and • what is meant by 'default interest' and when it might constitute a penalty This Practice Note does not discuss interest provisions in loan documentation in detail. For information on interest provisions in Loan Market Association (LMA) facility documentation that is based on risk-free rates such as compounded Sterling Overnight Index Average (SONIA), see Practice Note: Interest provisions in risk-free rate based loan agreements. For information on interest provisions in term risk-free rate documentation, see Practice Note: Term risk-free rates in loan agreements For an introductory guide to LIBOR transition, see Practice Note: Introductory guide to LIBOR transition. Cost of lending Banks

A lending transaction is simply the making of a loan of money by a lender to a borrower. This can range from a small overdraft from a bank to a customer to secured, syndicated facilities made to make an acquisition of a multi-national group. This Practice Note provides an introductory guide to lending transactions. It discusses the different types of loan transaction and provides an overview of the structure of a typical loan transaction, before discussing the documentation involved in loan transactions and security, quasi-security and intercreditor issues. It outlines some key legal issues that can arise on lending transactions before providing an overview of specialist finance transactions, including project finance, real estate finance, acquisition finance and asset finance. This Practice Note provides an introduction to loan transactions in a commercial context. It does not cover consumer lending. Loan transaction collection Our Loan transaction collection is an introductory resource for junior lawyers and provides an overview of each phase of a loan transaction and the tasks that lawyers are required to complete as part of each

This Practice Note provides an introductory guide to typical provisions found in a straightforward facilities agreement for leveraged acquisition finance transactions. It provides an overview of the possible sources of finance for leveraged acquisitions before discussing the main ways in which a typical facilities agreement for leveraged acquisitions differs from a standard investment grade facilities agreement. Each section of a standard senior leveraged finance facilities agreement is then discussed in turn. For an introductory guide to acquisition finance, see Practice Note: Introductory guide to acquisition finance and for a glossary of commonly used terms and jargon, see the Glossary of acquisition finance terms and jargon. Sources of finance for leveraged acquisitions—impact on documentation Senior facilities are one of a number of different possible sources of finance for leveraged acquisitions—this section contains a brief overview of the various possible funding sources. An acquisition finance transaction will normally be funded using a mixture of debt and equity. The debt may take the form of high yield or senior notes or loans or both. Where the

This Practice Note provides an introduction to loan portfolio sales, considering in particular the types of portfolios that exist for sale and the identities and motivations of typical sellers and buyers. It also describes a typical portfolio sale process. For information on the key issues which may arise on loan portfolio sales, see Practice Note: Loan portfolio sales—key issues and for information on the main legal documentation used, see Practice Note: Loan Portfolio Sales—legal documentation. What is a portfolio sale? A loan portfolio sale is the disposal by a lender of a group of loans, rather than a single loan (as might be undertaken in a trade on the Secondary loan market). The selling lender may have been involved in origination or initial syndication of the relevant loans, or acquired them on the secondary loan market from other investors. Portfolio sales gained prominence following the global financial crisis in 2008, (see: 'Motivations of sellers' below). Many regulated lenders needed to de-leverage their balance sheet and improve regulatory capital ratios owing to political and

This Practice Note explains: • what is meant by a loan transfer • the key issues to consider in relation to a loan transfer • the main methods of transferring a loan under English law • transfer provisions in loan agreements • the borrower consent requirement • process and documentation required for transfer, and • overseas law issues What is meant by a loan transfer? A loan transfer refers to the transfer by a lender of its rights, and often also of its obligations, under a loan agreement. Rights will typically include the right to be repaid the loan principal and interest as set out in the facilities agreement. The lender will have other contractual rights, such as the right to demand repayment early if there is an event of default and to recoup costs and expenses. The key obligation, that may also need to be transferred, is the commitment to make further loans under the facilities agreement—this may not be relevant if the loan being transferred is fully drawn. Loan transfers are common

This Practice Note sets out a basic introduction to project finance focusing on: • due diligence and ‘bankability’ • sources of finance for projects • project risks and risk allocation • types of project • the main project parties • the finance parties • key finance documents • key finance terms • key project documents • security and quasi-security in project finance transactions • renewable energy • the Equator Principles, and • green bonds Key features of project finance The term ‘project finance’ generally refers to the debt element of the funding for a project. The ‘project’ commonly involves: • constructing and/or operating something tangible like a road, bridge or a school, or • exploiting something tangible like gas, oil or gold The Basel II: International Convergence of Capital Measurement and Capital Standards framework (Basel II) defines project finance as: ‘a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure.’ It

This Practice Note provides an overview of a typical real estate finance (REF) transaction from the term sheet stage through to signing the financing documents, dealing with conditions precedent and, if a default should arise, enforcement of the lender's security. At each stage, this Practice Note provides links through to Practice Notes and Precedents which provide more detailed information on each topic. A useful guide to a general bilateral finance transaction can be found in the Loan transaction collection. For specific information on the key points to consider when entering into a real estate finance transaction, see: Real estate finance—checklist. Types of REF transactions Lending against the cash flow generated by a property is the most common form of real estate finance. In its simplest form, it involves a loan to a borrower which is repaid from the rental income of the borrower’s property. For more information, see Practice Note: Introduction to real estate finance—the lending structure. Property investment or property development? Real estate finance transactions are either investment finance transactions

This Practice Note provides a high-level introductory guide to repackagings. For links to material giving more detailed guidance on some aspects of repackaging transactions, see: Further information. What are repackagings? Repackagings are a type of asset-backed security (ABS)—ie a limited recourse debt security issued by a bankruptcy remote special purpose vehicle (SPV) and collateralised by a financial asset or pool of financial assets. The aim of a repackaging is to create a bespoke investment—in the form of ABS—which has a mix of credit, currency, interest rate and/or payment date characteristics not otherwise available to the investor. Typically, an issue of repackaging ABS will be held to maturity by a single investor and may have been initiated by a ‘reverse enquiry’ from the investor. What is an asset swap repackaging? Asset swap The simplest and most common kind of repackaging is an asset swap repackaging (or asset swap repack). An asset swap is a routine financial transaction in which an investor acquires interest-bearing bonds and then enters into a swap agreement with the investment