Our Legal Insights Blog

Last week, Bloomberg published a story called ‘Fake Ebitda’ Masks Risk in Debt-Laden Companies, noting how bad management is at forecasting EBITDA.A report from S&P reveals that 97%of sub-IG companies that announced acquisitions in 2019 fell short of EBITDA forecasts in their first year of earnings.

What are the goals of the other parties in the deal. Recent cautionary tales from the U.S. of “creditor on creditor violence” put this question in a slightly different light.

Contractual analysis done in isolation is inherently incomplete. Contracts do not exist in isolation – they are promises made by the parties to the agreement, and the identity of the parties always matters.

Unrestricted Subsidiaries did not always strike fear in the hearts of lenders. I explain in the first chapter of the Leveraged Finance Covenant Training course that back in my baby lawyer days these entities were fairly benign from a lender-perspective – indeed, they might even bode well for investors.

Finding delta between reality and perception can happen in two ways in credit – either based on the company’s performance and prospects, or based on the borrower’s ability to take actions under the covenants.

We spent a lot of time thinking about how to bring that level of understanding to a virtual classroom. Education technology has come along way over the past few years, so we chose an online learning platform that supports engagement with complex course material through case studies and quizzes and facilitates interaction with me and amongst the students themselves.

I ask students at the start of the LFCT course to forget everything they know about covenants. In a market that has become overly reliant on “precedent”, turning out deal after deal with cookie cutter covenants, this is an essential first step. Let me explain why.

As we enter a new year, I have been reflecting on a question I’m sometimes asked: if wide covenant flexibility is now the norm in the leveraged finance market, does understanding them really matter?