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www.psi-network.de 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

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