I would like to try once again to generate some discussion within the group.
How do you effectively “sell” committing resources to covenant compliance? Do you think that finance has a chance in folding this under an ERM framework? Compliance is often managed outside of the treasury function, how does treasury work with internal audit or
Debt Covenants: Educating Senior Executives on the Risk of Non-Compliance
Answers
Ernie,
The non-compliance of the debt covenants would result in default, which can have a material impact on any company.
Hence, the companies I have been involved with in the past, non- compliance of the debt covenants has always been on the radar screen of the senior executives. Also the US SEC has been vigilant for the non-compliance of the debt covenants and have insisted that the companies provide proper disclosures in their MD&A if they are in a "breach" or a "potential breach" in the debt covenants and the impact thereof.
It would be interesting to see what others in the group have to say on this issue.
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Agree, should be on radar screen of senior
This is one of those binary operational risks in my view: if it works nobody cares but if it blows up there are serious problems.
If one is struggling to get senior management's attention, perhaps the best approach is to highlight for them what happens if non-compliance / default were to occur.
I agree with the prior two comments posted. It is binary and folks don't care unless the covenants are breached. One way to bring attention to the issue is to stress test it. If you have a
I'm curious, how do other professionals do their EBITDA and balance sheet forecasting? I expect that there are a lot of
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I have primarily used Excel modelling - however, I agree with your comments that the Excel model do get broken down easily and if you do not keep proper controls it also does not provide any continuity due to lack of proper documentation.
For example, if somebody is preparing some results based on a Excel modelling for you - I will suggest that you implement some spreadsheet ground rules for your company (e.g. - hard coded numbers should be in blue colour, currency should be properly identified if dealing in more than one currency, adding comments for the data source, adding a tab that provides a summary of the data source and any other relevant source of information, version control, password protection of formulae, etc.). Will also like to hear from other members as to what type of spreadsheet controls they have introduced.
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