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Instructor Blog - Covenants

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Complex Loan Structuring


  • admin

  • 11/26/2021 5:22:47 PM

  • 0

  • Covenants

Q: Do you have a course on Understanding Complex Loan Structuring, i.e., when loans fall outside of the normal underwriting guidelines how do you work with the client to find lending solutions?

A: While we don't think we have no course that specifically addresses the topic, Session 4 in our Cash Flow series gets at the issues in a section on worst cash projections. In that section, we project on a monthly cash basis i.e., what a lender needs to do if a loan falls outside the normal underwriting guidelines.

Cash Flow Projections, Competitive Forces, and Management Assessment

A monthly cash projection means projecting cash flows from the company, from guarantors, and from other third parties, e.g., the federal government or other outside lenders or investors, to identify possible sources of cash or to identify steps the borrower must take to generate the cash from its operating activities. And that leads to the covenants and conditions necessary to assure, if honored, the cash to meet cash flow deficits over the next six to 12 months - or longer.

When lenders talk about loan structure, they are mostly talking about the covenants and conditions that will assure the necessary cash flow, e.g. a limitation on distributions and loans, a delay in fixed asset spending, a reduction operating expenses, a cash loan or injection from an owner or guarantor, a re-negotiation of scheduled debt repayments, a prohibition on any further borrower, a limitation or ban or loan repayments to owners or partners, a tighter borrowing bases etc.

On the surface a complex issue but, in reality boils down to identifying the months and amounts of cash deficits, identifying the steps and measures necessary to secure the required cash or eliminate the deficits, and then creating the covenants and conditions that, if honored, will assure sufficient cash to service the debt.

Course overview: Cash Flow Projections, Competitive Forces, and Management Assessment

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