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Negotiating Fair Financial Covenants

  Arthur F. Rothberg, Managing Director, CFO Edge, LLC  
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  Article Summary  
  A slowly-recovering economy, the tight credit market, and upcoming changes to accounting principles as a result of joint FASB/IASB projects are making successful financial covenant negotiation and management more important than ever.
  Financial covenants establish benchmark metrics that can ensure a company stays healthy. If the requirements are too stringent, too sensitive or too difficult to meet, they can put the same firm in a stranglehold. It is always possible to negotiate financial covenants if time is taken to understand lender needs, prepare thoroughly, and engage in constructive discussions on covenant issues.  
  For executives responsible for raising capital for their firms, this CFO Edge article provides an overview of financial covenant negotiation, a look at current and upcoming factors impacting covenants, and courses of action to ensure successful financial covenant management.
  Topics addressed in the full article include the following:  
  • Preparing for and entering into financial covenant negotiations
  • Understanding the lender’s perspective and the covenant relationship
  • A comparison of affirmative and restrictive financial covenants
  • Reviewing and monitoring adherence to covenants
  • Projecting covenant impact from changes in financial conditions
  • Addressing how FASB/IASB joint projects may impact covenants
  • Handling strict technical default clauses
  Failure to stay ahead of the curve while negotiating financial covenants can place an organization at significant risk, and a proactive approach positively impacts both new covenant negotiations and ongoing covenant management.  
  Open the entire article as a PDF  
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