Loan covenant compliance has become a critical part of the treasury department, as lenders are looking for covenant breaches as a way to reprice credit or exiting deals.
What is a loan covenant?
A loan covenant is a condition in an agreement that requires certain actions or conditions to be carried out or complied with. A loan covenant could require the borrower to fulfill certain conditions, restrict certain activities or forbid the borrower from undertaking certain actions. Violation of a covenant can result in a default on the loan, penalties or other consequential actions.
A part of the treasury department
Many treasury departments are increasingly moving away from being merely a subject matter function within finance, and instead becoming a vital part of the company that delivers shareholder value. The treasury department has become a warrantor for the balance between the company’s own financial funding and external financial funding. This helps to ensure that the company delivers a healthy return on equity and invested funds.
Key tasks in the treasury department include amongst others to monitor all covenants in loan agreements and ensure that agreements are never defaulted. Defaulting a loan covenant can be very risky for most companies – and often the company’s survival will be in jeopardy if a covenant is defaulted.
The treasury department is also often responsible for running the inhouse bank, optimising the cash position on a daily basis, aggregating foreign exchange positions on group level, and purchasing hedging and risk positions.
What is needed today?
Many treasury departments are in need of a tool that can support simple task management, process management, and documentation of day-to-day operations, along with the more complex monitoring and reporting of covenants in loan agreements. At the same time, it is becoming increasingly important that the treasury department’s work can be shared with internal and external auditors, so that key numbers can generate value for the rest of the company. Moreover, the board of directors and the management are increasingly demanding risk maps that specifically include the areas that the treasury department deals with, such as liquidity risks, counterpart credit risks, currency risks, etc.
Working with the treasury department
Once a covenant has been breached, the treasury department can do nothing but deal with the consequences. However, by improving debt compliance processes and procedures, and implementing best practices, companies can take a much more proactive approach to covenant oversight and reduce the risk of a covenant breach.
Impero can be used for optimizing and managing the compliance processes and procedures, and can support best practices. Moreover, Impero can ensure that double work is avoided by sharing assurance with all relevant parties, which is often relevant for a treasury department.