From the October 2009 issue of Treasury & Risk magazine

Tracking Covenants

As the credit crisis makes it tougher to find funding, both banks and corporate borrowers are paying closer attention to the covenants, or restrictions, in loan and debt agreements. Now a couple of treasury consultancies have launched an Internet-based solution that helps finance departments ensure they comply with all their loan covenants. The Debt & Covenant Manager sets out the contents of loan agreements in a wiki format, using a set of interlinked Web pages. It is produced by Debt Compliance Services, a joint project of Corporate Finance Solutions and Greenwich Treasury Advisors.

"People think compliance is mostly financials compliance and a couple of very big negatives," says Jim Simpson, managing partner of Corporate Finance Solutions, citing negative covenants such as restrictions on asset sales or mergers. But covenants can involve a range of other issues, he says.

"Some of these covenant issues are mundane. A number of them are real traps," Simpson says, noting, for example, that loan agreements may require companies to submit IRS Form 5500, the annual retirement plan filing, to their lender. "Uncured, it's as big a default as a financial covenant breach," he says.

When Debt Compliance Services sets out a loan agreement on the Web, it compiles a compliance schedule that includes which managers are responsible for each item and any timing or limits involved. It also prepares Web-based questionnaires that check whether requirements have been met and provides a dashboard to track compliance.

If a loan agreement is amended, the Web version is updated, with a link to the original language. There's also space for company executives to add interpretive comments. The Web version "really becomes a living, breathing document," Simpson says.

Al Gever, CFO and executive vice president at Smart Balance, a New Jersey-based maker of a butter substitute and other healthy products with $221.8 million in 2008 revenues, says that in the past, if he needed to check whether some business decision might touch on a covenant, he had to rummage through the hundreds of pages of two debt agreements.

Now, if there's a topic he's searching for, Debt & Compliance Manager "allows us to find very easily where that term resides in the loan agreement and review its relationship to the remainder of the loan agreement," Gever says. "It's a time saver and it's given me a better sense of security."

Simpson wouldn't cite a price for the solution, but says, "It's a lot less than the cost of default or arranging a new loan."


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