TOOL 2.2
PRACTICAL CHECKLIST
DATA SOURCE & COVENANT BREACH HISTORY
| 1. What is the source of the information about the breach? | • Client? • Agent bank? • Other bank? • Own research? |
| 2. Has only one covenant been breached or more? | • One – what is it? • More – what are they? • Investigate for further breaches in reps and warranties and events of default |
| 3. Is this the first breach or have breaches occurred before? | • Yes – 1st breach • No – when were earlier breaches, what action was taken? If no waiver was issued check legal position |
CERTAINTY OF DEFAULT
| 4. For financial covenants have we checked: • Who the covenant is set on? • The exact definition of the covenant? • The information that the calculation should be based upon? • The calculation itself? Is it Client or Bank prepared? | • Borrower/Parent/Group/Other credit base? • Beware “commonly used” terms such as net worth, debt, EBITDA etc. • Consolidated/ unconsolidated/ annual/ interim • Check and recheck the numbers |
| 5. For non-financial covenants have we checked: • Who the covenant applies to? • The exact wording? • The information that the covenant should be checked against? | • Borrower/Parent/Group/Other credit base • Beware exclusions • Take legal advice if relying on “materiality” or “reasonableness” |
| 6. Is the client aware of the breach? • If yes, has the client supplied any information? For example an explanation of the reason, an indication of when it will be rectified? • Is any information in writing or merely verbal? | • Yes/No • Yes/No – what information has been received? • Written/verbal |
| 7. Does the documentation allow for any cure period? | • Yes – 1st breach • No – when were earlier breaches, what action was taken? If no waiver was issued check legal position |
LEVEL OF BANK RISK AND REPORTING REQUIREMENTS
| 8. Do you believe that the breach indicates an increased level of risk for the bank? | • Yes/No – support your conclusion with facts |
| 9. Who should the breach be reported to? • How many facilities / legal counterparties /credit bases are affected by the breach • What formal reporting/approvals are required? • What are your recommendations? • If a waiver is required charge a fee | • Line Management • Client Management • Risk Management • Restructuring Department • Other branches/departments • The client • Participant banks (if we are Agent) |
| 10. Which other financial institutions /creditors are aware and / or cross defaulted by the breach | • Are their actions negatively impacting on our debt priority position |
WAIVER CONTENT
| 11. Set a clear time frame and be clear what your expectations are at expiry | • Default to be remedied? • Further action to be taken by the client to improve the bank’s position • New structure in place acceptable to the bank? |
| 12. Use increase negotiation power to improve the Bank’s position where possible | • Collateral • Stepping covenants until original levels reached • More frequent compliance • Milestones for information delivery (e.g. projections) and actions by the client e.g. assets sales etc. |
| 13. Assess impact on RAROC | • Charge penalty interest • Take waiver fees |
Notes
• Calling default is rarely in the Bank’s interest.
• Non-issuance of a waiver puts the banks legal rights in jeopardy. So the key decision is under what conditions the waiver is issued.
• Always inform someone else of the breach
• Don’t inform other banks until you have been through the checklist and got approval for your proposed course of action
• Don’t talk to the client until you have your facts clear
• Unless there is strong factual evidence to the contrary consider the breach serious
• If the agent bank is pushing through a waiver you do not agree with then start to enlist the support of likeminded syndicate members to build the required voting block for tighter action next time
