Debt Covenant Report

What is a Debt Covenant Report?

A debt covenant report is a financial document covering the performance of your company in relation to the targets specified by the lender as part of the debt agreement.

A debt covenant specifies the operational and financial targets that your company has to meet for a specified time period. It may also restrict or prohibit the business activities that may impact your company’s performance. A debt covenant report benchmarks the performance of your company against defined targets.

Your company’s management is required to provide a compliance certificate to the lenders, indicating that the targets for a particular tenure were met. A failure to meet such covenants may lead to penalties or even call for a full payment.

A debt covenant report typically measures your company’s performance on the following parameters:

• Liquidity and solvency ratios that assess your company’s ability to meet short- and long-term financial commitments
• Profitability ratios assessing your company’s ability to generate earnings compared to its expenses
• Other financial indicators like revenue, capital expenditure and EBITDA
• Operational indicators related like number of customers and number of sellers

Why is Debt Covenant Reports important for business today?

A debt covenant report enables your company to:

• Mitigate risks related to non-compliance
• Avoid any default that may impact your company’s financial health
• Assess the amount of additional debt that your company can raise
• Establish financial credibility of your company as these reports are audited

Why is it important for an event tomorrow?

A debt covenant report is important for an event tomorrow, as it helps:

• Ascertain the performance of your company by analyzing its liquidity, solvency, and profitability
• Assess the covenants related to the funding, management control and ownership of your company
• Determine the ideal mix of capital required and understand if additional capital can be raised using debt instruments
• Forecast future earnings of your company by evaluating historical financial performance

Pros of addressing Debt Covenant Report

• Ensured compliance with the covenants stipulated by the lenders
• A strong financial background, as financial statements are certified by an accountant
• Improvement in operational efficiency, as regular tracking of these metrics indicates areas that may require corrective action
• Allows access to new funds by indicating financial performance
• Validation of financial and management efficiency to the lenders

Cons of not addressing this topic

• Impact on the financial health of your company as non-compliance may lead to a reduction in the tenure of repayment or additional penalties
• Increased the risk of default as business performance is not tracked against stipulated covenants
• Potential negative impact on the financial credibility of your company