Negotiating credit agreements is the subject of an upcoming AFP Guide, due out February 6.
For many U.S. companies, the pressure is on to review and renegotiate their credit facilities. Here’s why:
- Interest rates are finally on the rise.
- There’s rising demand for credit.
- Banks are readying themselves for the onset of Basel III capital and liquidity regulations.
As a result, many practitioners report that their banks are urging them to review and potentially reopen credit facilities, even if they’re not due for some time, in order to lock in advantageous terms. While credit agreements are a perennial issue for treasurers, they are top-of-mind now. That’s the subject of a new AFP Guide, Negotiating and Complying with Credit Agreements, due out in February. The guide includes multiple case studies and expert commentary on securing a new facility and making sure treasury meets all the compliance requirements.
According to the AFP Guide, based on dozens of conversation with practitioners and treasury experts, one of the most important aspects in negotiating a renewed or new facility is ensuring that the company can comply with any covenants and restrictions present in the credit agreement.
Key tips on ensuring compliance
Here’s practitioners’ and experts’ advice on how to make sure the company doesn’t trigger any covenant or restriction violations, leading to fees or even termination of the agreement.
1. Don’t promise what you can’t deliver. That sounds straightforward, but according to experts, a lot of companies don’t think promises through. Look forward to the next four to five years and think about possible actions such as debt deals or acquisitions that may need to be incorporated into the original agreement.
2. Review compliance on an ongoing basis. Practitioners and experts advise treasurers not to wait until it’s time to file the certificate of compliance to review the numbers. Constant monitoring ensures that there are no nasty surprises, which ties into the next best tip.
3. Go to the bank early with any prospective violation. Banks hate surprises. A potential violation should part of the conversation as soon as treasury is aware. Approaching the bank early casts the relationship as a partnership. It also gives everyone time to negotiate a waiver or an amendment before it’s too late.
4. Create a checklist of key compliance terms. Once the agreement if finalized, treasurers say the best thing to do is go through all of it and condense the requirements into a one or two-page shortlist of key requirements that can be reviewed more frequently. It’s hard to keep all the restrictions in mind on an ongoing basis, and share them with others who may take actions that could violate covenants. A checklist allows treasury to quickly run through numbers early in the quarter and note any potential problems.
5. Educate management and business units on what decisions can lead to violations. Treasury is not the only function that can take action that could violate a covenant, e.g., raising debt which changes the leverage ratio. Business leaders can initiate asset or equipment sales that violate either regular covenants or in the case of secure facilities, the security agreement. That means treasury needs to meet and educate anyone in the business who may be able to take action that violates a covenant.
6. Sit in on conversations regarding acquisitions or asset sales. One way to ensure nothing goes wrong is to make sure treasury is part of any process that leads to an asset sale or acquisition that may trigger a violation. This way treasury can monitor its checklist, alert the business and/or the bank and ensure compliance with the credit agreement.
7. Look back at past compliance issues. That’s a good way to spot new issues and ensure nothing goes wrong.