Get the FLASH PLAYER to view this magazine:

Get Adobe Flash player

- or -

View as HTML version PSI Journal 4/2016 est terms, the successive reduction of spe cial credit lines, a demand for (additional) securities or, in the worst case, the cancellation of the credit facility. COVENANTS ARE GOING TO INCREASE Due to the economic crisis, banks are having to get more deeply involved with companies and their daily business than in the past. Even the requirements of Basel II and the internal “MaRisk” lending practice (minimum requirements for risk management) are forcing lenders to search for ways to limit or be able to respond in due time to lending risks. Especially the additional clauses enable the banks to manage risk and act consistently in the event that these clauses are not observed. Thus covenants help meet the increased need of banks for security and adjust terms to the risk. Because this opens up ways to act earlier than used to be possible, covenants will gain in importance in future credit transactions. BE SURE TO ADHERE TO AGREEMENTS Within the scope of freedom of contract, banks are of course free to insert all sorts of subsidiary agreements into the agreements, providing the company taking out the company will only be able to refuse to accept the conditions for granting or extending credit stated in the covenants in exceptional cases. This would require another lender, for instance, or a stronger negotiating position for the company. If subsidiary agreements are made, they must by all means be adhered to. Otherwise the company will be in for a big surprise when, for instance, it submits documents for auditing (for example, quarterly business analyses) and discovers that loan conditions (such as withdrawal practice, equity ratio, or return on sales) have not been met, causing the bank to deduce that sanctions must be implemented. EXCESSIVE WITHDRAWALS AND PROFIT DISTRIBUTION PRACTICES In the future, banks are going to make increasing use of covenant requirements to prevent the outflow of liquidity and profits. Thus they wish to ensure that companies, for instance, are not “decapitalized” or their liquidity “dried out” due to withdrawals or company split-ups, and/ or holding constructs. In more and more cases, excessive withdrawals will not be tolerated and profit distribution practice regulated. CREDIT RATING DETERMINES AGREEMENTS In the future, lending practice to SMEs will depend on how the creditworthiness of the banks’ clients develops over time, what sort of growth forecast a company has, and how the bank defines the company’s economic sector, which is used to derive the risk estimate. Of course, the relationship between borrower and credit institute hitherto will also be of significance. If the company has verifiably strong chances of growth and the physical securities are insufficient to give the bank adequate loan security, then covenants will be used disproportionately to “steer and guide” the client. What is certain, is that larger loans will be requested in the presence of plausible proff it forecasts. The less the physical securities can be provided, the greater the probability that additional covenants will be included in loan agreements. 9

Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Page 8
Page 9
Page 10
Page 11
Page 12
Page 13
Page 14
Page 15
Page 16
Page 17
Page 18
Page 19
Page 20
Page 21
Page 22
Page 23
Page 24
Page 25
Page 26
Page 27
Page 28
Page 29
Page 30
Page 31
Page 32
Page 33
Page 34
Page 35
Page 36
Page 37
Page 38
Page 39
Page 40
Page 41
Page 42
Page 43
Page 44
Page 45
Page 46
Page 47
Page 48
Page 49
Page 50
Page 51
Page 52
Page 53
Page 54
Page 55
Page 56
Page 57
Page 58
Page 59
Page 60
Page 61
Page 62
Page 63
Page 64
Page 65
Page 66
Page 67
Page 68
Page 69
Page 70
Page 71
Page 72
Page 73
Page 74
Page 75
Page 76
Page 77
Page 78
Page 79
Page 80
Page 81
Page 82
Page 83
Page 84
Page 85
Page 86
Page 87
Page 88