Best practices in debt compliance management.

• Author: Wallace, Jeff
• Position: Technology

In the past, most companies didn't consider debt compliance a priority. Times were good, lenders were eager to book loans and covenants, and the financial ratios and permitted baskets seemed large enough. But in today's colder, crueler debt markets, chief financial officers and treasurers can no longer afford to be complacent. The risk/cost trade-off no longer favors an informal process, which, due to its inefficiencies, is often unnecessarily time-consuming.

First, their friendly account officer is often gone and their banks' credit committees are scrutinizing all defaults as an opportunity to increase returns and reduce risk. Minor defaults will cause pre-2009 agreements to be re-priced at much higher current market rates.

Second, since maintaining access to the capital markets is a significant enterprise risk, many audit committees are now focusing on how management is ensuring against avoidable defaults and proactively managing foreseeable default risk.

Third, new credit agreements require new, expanded compliance processes as agreements have many more conditions. They are also more onerous with less time to notify and cure. Covenant compliance is now an ongoing exercise that can't wait for next quarter-end's review.

Best practice is a forward-looking corporate debt compliance policy based on a comprehensive list of all covenant requirements, permitted baskets, notifications and deliverables. With this list, the policy can assign compliance responsibility to those whose decisions affect specific covenant requirements.

Web-based technology can eliminate the paper shuffling, improve finance, legal and business unit collaboration, significantly reduce compliance time, minimize errors and proactively manage the lenders.

The Costs of Noncompliance

A primary responsibility of the CFO and treasurer is maintaining their company's ability to meet its operating and financial obligations. While they cannot cure poor business results, their job is to minimize its impact by managing their lenders, seeking consents before the fact, not waivers and amendments after the fact.

Like boards of directors, lenders hate surprises, which adversely affect their assessment of the competence of the company's management and the underlying credit risk. Lenders expect companies to:

* Fully understand all of the requirements of their debt agreements;

* Effectively marry operating performance to the debt agreements on an accurate and timely basis; and

* Advise them...