Tales of the Covenant Whisperer

September 8, 2023

Tales of the Covenant Whisperer

It was a pleasure to speak with Geoff Castle of PenderFund’s lead fixed income portfolio manager on their Profiles in Credit podcast. Our conversation made covenants fun whilst at the same time underscoring their strategic importance to credit investors.

One of the topics we discussed was the importance of understanding the big picture when it comes to covenant analysis – my example was when, years ago, I was reviewing the quarterly report for a high yield issuer and noticed trends in their EBITDA add-backs that suggested to me that they were making a real effort to reach the highest number possible (see, e.g., line item for savings from renegotiating their copy machine contracts).

To one well-versed in covenant analysis, and with some basic details about the borrower (the private equity owner was nearly five years in),this hinted of a planned sale. Why? The borrower’s covenants included a portability exception to the Change of Control provisions, and compliance was measured by reference to a leverage ratio – the very same leverage ratio that this borrower managed to meet by the skin of its copy machine contract savings just a few months later, depriving its high yield investors of a 101% put.

We also talked about the danger of neglecting the details. My example here was the deletion of just two words from the Restricted Payments covenant that would give that borrower the ability to pay dividends from the builder basket for a full 30 days after missing a coupon payment. How did I spot that one? From a careful review of the blackline against that sponsor’s counsel’s last deal, which had left those two protective words intact. (I wrote about this in a blog for FLT).

This example proves just how important it is to know whereto look for covenant risk – and that’s exactly what our Leveraged Finance Covenant Training teaches our clients how to do. But don’t take it from me ,here’s Geoff on the value of the course:

“We looked hard for a program that could increase our team’s ability to understand the legal issues embedded in credit securities. What we found in the Leveraged Finance Covenant Training was not just a number of tips and pointers about how to understand specific issues, but also a framework that allows our team to see the comprehensive picture of how lenders can evaluate the protection offered to them in any particular deal. The course is engaging and the quizzes and exams offer excellent re-enforcement of learnings. This online course is a cost-effective and flexible way to get your team trained in a critical area that is a relative blind spot for business schools or standard financial certification programs.”

This is a great time to join us on the course – shortly we will announce the first of our live events, taking place in June, and we’re beginning our series of live Zoom Q&A sessions that give our students the ability to ask any burning covenant questions that have come up for them during the course.

We don’t just hand over your login details and wish you the best. We are by your side every step of the way, from Foundations through to the Final Exam. Get in touch for a demo and to take our taster course, or take our Entrance Exam and test your covenant knowledge!

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