Debunking Common Covenant Myths #2 –Covenant Debt = Balance Sheet Debt
Welcome to day two of our Debunking Common Covenant Myths mini-video series, where we explore adventures in covenant calculations – specifically, we bust the myth that the debt figure used for covenant calculation purposes is the same debt figure that’s presented on the balance sheet.
That is definitely not the case – the debt figure presented on the balance sheet will invariably be higher than the debt number used for covenant calculation purposes.
There are a number of provisions to consider here:
- First, the definition of “Indebtedness”, which will back out Qualified Receivables Financings, amongst other categories of debt.
- Next, the definition of the leverage ratio itself will back out revolvers and working capital facilities(and will also likely net cash).
- Finally, the definition of the secured leverage ratio will often only include debt secured by the transaction collateral, reducing the figure even further.
As a result, the debt figure used for leverage ratio purposes will be much lower than the debt line of the balance sheet.
FLT students have access to an entire module on Calculation Mechanics, which provides them with a solid foundation on these topics, and we recently added a module on Covenant Capacity Calculations, which takes students step-by-step through covenant calculations using a case study to ground the concepts in a real deal.
Get in touch to find out more about our first-of-its-kind online covenant education platform and for access to our taster course.
by Sabrina Fox