Undertakings (covenants)

This guidance note addresses:

• • what undertakings, or covenants, are in the context of finance documents;
• • the usual types of undertaking found in facility documentation recording a corporate loan to an investment grade borrower (information undertakings, financial covenants and general undertakings); and
• • the common negotiating points and concerns for both the lender and borrower.

Where appropriate, this guidance note highlights relevant provisions in the Asia Pacific Loan Market Association (APLMA) Australian secured term and multicurrency revolving syndicated facility agreement.

See Undertakings (covenants).

Negative pledge undertaking

This guidance note will specifically examine the undertaking prohibiting the creation of security which is often referred to as the negative pledge. The negative pledge provides that, with some exceptions, the borrower may not create or permit to subsist security or quasi-security over its assets in favour of a third party. This guidance note also covers the restriction on the borrower’s ability to make asset disposals typically included in facility agreements.

See Negative pledge undertaking.

Negative pledges

This guidance note further examines negative pledges, often being one of the most important undertakings in a facility agreement. It addresses the following:

• • why negative pledge clauses are used in commercial transactions;
• • the consequences of breaching negative pledge provisions;
• • how negative pledges are viewed in the context of security and quasi-security; and
• • key considerations when drafting a negative pledge clause.

See Negative pledges.

Financial covenants — principles

Financial covenants are a specific type of undertaking. They are promises to meet or comply with certain financial thresholds.

This guidance note examines:

• • why financial covenants are used in finance transactions;
• • how financial covenants are selected for a particular transaction;
• • key issues which arise in the context of all financial covenants; and
• • what testing periods and compliance certificates are.

See Financial covenants — principles.

Common financial covenants

This guidance note explains:

• • the most common financial covenants used in general corporate lending, namely:
• • ◦ minimum net worth or tangible net worth;
• • ◦ gearing ratio;
• • ◦ leverage ratio or debt to equity ratio;
• • ◦ cashflow cover ratio;
• • ◦ interest cover ratio; and
• • ◦ loan to value ratio;
• • a typical starting point for each of those financial covenants; and
• • some items which could be included or excluded from definitions within financial covenants.

See Common financial covenants.