Hi,
My question relates to a particular bank covenant which I came across a while back and can't seem to resolve in my head.
A current client of a bank has a Net Trade Debtors to Bank Debt financial covenant they must comply with as part of their bank funding facilities.
i.e. put simply Debtors must be > 1.0x bank debt. This covenant provides comfort to the bank that they are funding the debtors only (which is the purpose of the bank facility).
Previously the client provided the bank with a spreadsheet for each debtor incl. tenor which enabled the bank to track each debtor funded. However, this created significant workload for the client of the bank.
As a result of the workload involved the client recently sought to amend their debtor finance facility. The newly proposed facility will involve the client sending their aged debtors schedule for a particular region to the bank and the bank then funds their outstanding debtors to assist their cash flow once on the 10th day of each month. Then on the 10th of the next month the client repays the bank facility and draws down for the new amount required.
This issue is that whilst on the 10th of the month they will be compliant with this covenant (as the bank won't fund more than their debtor outstandings), by the end of the month (when this covenant is formally measured) they could be in breach of this covenant.
Example: Debtors at 10th August = NZD10.0m and the bank provides funding of NZD8.0m (80% of debtor book) - covenant is complied with on 10th August. On 30th August debtors have been repaid so according to their management accounts NZD5.0m debtors remain outstanding. i.e. Bank debt = NZD8.0m and debtors = NZD5.0m. Ratio has been breached at 0.625x. This could result in the bank cancelling the debtor facility.
I'm struggling to think of other covenants which alleviate this issue whilst still providing the bank with comfort re: the debt they are providing is aligned with the client's debtor position. Any advice on the above would be appreciated.
My question relates to a particular bank covenant which I came across a while back and can't seem to resolve in my head.
A current client of a bank has a Net Trade Debtors to Bank Debt financial covenant they must comply with as part of their bank funding facilities.
i.e. put simply Debtors must be > 1.0x bank debt. This covenant provides comfort to the bank that they are funding the debtors only (which is the purpose of the bank facility).
Previously the client provided the bank with a spreadsheet for each debtor incl. tenor which enabled the bank to track each debtor funded. However, this created significant workload for the client of the bank.
As a result of the workload involved the client recently sought to amend their debtor finance facility. The newly proposed facility will involve the client sending their aged debtors schedule for a particular region to the bank and the bank then funds their outstanding debtors to assist their cash flow once on the 10th day of each month. Then on the 10th of the next month the client repays the bank facility and draws down for the new amount required.
This issue is that whilst on the 10th of the month they will be compliant with this covenant (as the bank won't fund more than their debtor outstandings), by the end of the month (when this covenant is formally measured) they could be in breach of this covenant.
Example: Debtors at 10th August = NZD10.0m and the bank provides funding of NZD8.0m (80% of debtor book) - covenant is complied with on 10th August. On 30th August debtors have been repaid so according to their management accounts NZD5.0m debtors remain outstanding. i.e. Bank debt = NZD8.0m and debtors = NZD5.0m. Ratio has been breached at 0.625x. This could result in the bank cancelling the debtor facility.
I'm struggling to think of other covenants which alleviate this issue whilst still providing the bank with comfort re: the debt they are providing is aligned with the client's debtor position. Any advice on the above would be appreciated.
