Simonsen Vogt Wiig AS
  October 21, 2022 - Oslo, Norway

Interest cover ratio breaches in a world with rapidly increasing financing costs
  by Christian Berg Meland

Loan facilities and bond loans usually include financial covenants, which are financial metrics the borrower/issuer need to comply with during the term of the financing agreement. The Norwegian market is dominated by maintenance covenants, which means the covenants must be complied with at all times.

Over the course of a few months, geopolitical unrest, high inflation and prolonged supply chain issues have led central banks to increase interest rates and lenders to increase their risk margins. Other than the obvious effect on a company’s liquidity and profitability, increased financing costs may also lead to borrowers and issuers risking breaching financial covenants in their financing agreements. One covenant borrowers should pay close attention to in the current economic climate is the interest cover requirements, as increased financing costs will directly affect the ratio negatively.

The interest cover ratio measures a borrower’s interest service ability by measuring the ratio of the borrower’s EBITDA to its net interest costs. Typically, this is measured on a rolling 12-months basis and tested quarterly. Thus, the full effect of increased financing costs will take time to materialise. Further, as EBITDA is a non-GAAP measurement, the definition of EBITDA may differ between financing agreements. This implies that some borrowers may struggle more than others, it all depends on the add-backs they are permitted to make to their net income when calculating their EBITDA.

Borrowers and issuers with interest cover ratios should carefully monitor their EBITDA and financing costs projections going forward. If you risk breaching an interest cover requirement, we recommend addressing the issue with your lenders sooner rather than later. Borrowers with temporary challenges only can address a potential breach through a temporary waiver. For others, an amendment such as a temporary or permanent readjustment of the interest cover requirement may be necessary. Constructive discussions with lenders are often easier before a breach occurs as lenders value diligent borrowers. As the increased financing costs borrowers are experiencing are a global phenomenon and unprecedented given the rapid increase, lenders may be more amenable to waivers and amendments than they would have been if the underlying issue was sector- or company specific.

We assist lenders, issuers and borrowers on a regular basis with a variety of financing matters. Do not hesitate to reach out if you need assistance with waiver requests, discussions with lenders or an analysis of your interest cover ratio and steps that can be taken to mitigate the situation.




Read full article at: https://svw.no/en/insights/interest-cover-ratio-breaches-in-a-world-with-rapidly-increasing-financing-costs