A recent survey of finance executives found that many companies overlook or minimize
so-called debt covenant compliance risk. This is the risk that a company could default on a bank loan because it failed to keep promises spelled out in a loan agreement.
A recent report, “Best Practices in Debt Compliance Management: August 2011 Benchmarking Survey Results,” released by Debt Compliances Services LLC., a technology vendor, explains that companies of all sizes tend to do a decent job of keeping the financial promises made to their lenders; for example, maintaining capital ratios at certain levels and submitting their financial statements for review in a timely manner. However, they rely on weak processes and lack adequate policies for managing non-financial covenants, which largely involve administrative procedures.
In the current environment, with banks under severe pressure by investors and auditors to keep tight control over their own risk exposures, the danger is growing that a company can find itself abruptly cut off from operating capital because of a seemingly small administrative error. The report offers a list of best practices based on its survey of 192 companies. It also exposes the common sins of those that mismanage debt covenant compliance risk. To download the report, click here.