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05/05/17
14:36
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Originally posted by DeltaHedge
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Yep, cool. Last time i posted people didn't recognise it as a solvency measure.
I think it would be beneficial to elaborate on covenants.
Covenants are triggers in a financial loan agreement that the lender stipulates the borrower can not exceed. Once it is exceeded, the lender investigates the breach and determines one of two things. Was the breach a performance issue or an external factor. If it is an performance issue, this starts to raise some real concerns for the lender. The lender has the right to force the borrower to improve the covenant ratio to a more appropriate level. In the case of debt/ebitda, the only controllable input is debt. So the lender can force the borrower to sell assets to pay debt. Hence, why many people are saying Vocus should sell some assets to reduce debt to prevent this trigger. Furthermore, a breach of a covenant is actually a default. Different to missing a repayment but it is a contractual breach and may impair their future credit rating. It’s a bit like a home borrower who doesn’t have home building insurance. That’s also a type of default.
Peace
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@DeltaHedge , what about refinancing before that covenant is reached, is that something thats done in situations like this ?
Seems like it would take a lot of pressure off (but yes reducing debt would be better)