CFOs going retro for Christmas this year?

Consistent with the trend for items which remind us of our youth to be beneath the Christmas tree these days (here’s hoping for the Sega Mega Drive mini from Santa…), this year I am seeing things which remind me of times gone by in relation to loan facilities with covenants (yes they do exist, for certain financing deals). 

The point is relatively simple: if a company has a breach of a financial covenant as at its accounting year end, then auditors and accounting standards may require that the debt is due within 12 months for the purposes of it balance sheet, even if the maturity date is some years off. This includes a financial covenant test which takes place on the last day of the financial year, even if the accounting records and compliance certificate are delivered weeks later. To make matters worse, a waiver by the lender after the year end does not help to resolve the issue. The risk is a highly unattractive aspect of the accounts to then have to explain to suppliers, investors and other counterparties going forward.  

So for those companies with a financial covenant test and a year end on 31 December, if you have any concerns regarding covenant compliance, it’s not too late (just about) for the CFO to add an extra item to their Christmas list: a financial covenant deferral or (if you’ve been really good) a waiver – just make sure that you have it before the end of the year!