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A Manchester lawyer has warned that arrangements already entered into by borrowers may be being breached due to the current climate. According to Stephen Foster, head of corporate at Berg Legal, in some cases a breach of covenants may lead to loans being called in and businesses collapsing.

He commented, “In the current difficult economic climate, lenders are seeking even stronger commitments from borrowers. It is often through no fault of the borrower that a covenant is breached. As the existing climate worsens, more and more lenders are using minor breaches of covenants to call in the loan.”

Only recently it was reported in the media that shareholders in Cattles could be wiped out after the sub-prime lender revealed it had breached its banking covenants. And accounts filed by Gordon Ramsay Holdings earlier this month showed that the group had breached some of the financial covenants with its banks.

Covenants are a set of agreements that firms agree to before banks hand out loans. The purpose of this is to set the boundaries within which the borrower can operate.

The covenants can be categorised into three separate forms: financial, information and operational covenants.

Financial covenants require the borrower to meet certain financial tests, such as debt to equity ratios. In addition, it is likely that a covenant would require a borrower’s minimum net value not to fall below a specified threshold. Potentially, the lender is concerned to ensure that it can monitor the financial position of the borrower and take any necessary protective action prior to the onset of any insolvency activity occurring.

Information covenants place an obligation on the borrower to supply certain information at certain times to the lender. The information required varies from each borrower but it is quite common for the lender to require copies of annual accounts and management accounts along with budgets and business plans.

Operational covenants restrict the ability of the borrower to carry our certain activities, such as the sale of assets outside the ordinary course of business.

Essentially, the covenant is a balance between the lender’s desire to achieve maximum security for the loan and the borrower’s desire to maintain adequate flexibility in order to run the business.

Foster explains, “Over time it is common for a borrower to forget the terms of the covenants given at the time of taking the loan and, unless prompted by the lender, the borrower may accidentally fall foul. However, the ramifications for breaching covenants depending on the severity and exposure the breach places on the lender, may be far reaching to the extent that the loan is called in, resulting in the forced sale of assets and/or the administration of the business.”

There are ways to protect yourself Foster adds “In order to avoid such an inconvenience and damaging event, we are equipped to review existing finance arrangements, give advice on the terms of covenants and likely breaches and also assist with any re-financing of existing arrangements should the same be appropriate.”

For further information in connection with any of these matters Stephen Foster can be contacted at or on 0161 833 9211.


Contact Julie Cohen at Red Fox PR & Marketing (e) (t) 07751 929687

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