Reading Financial Statements: Financial Covenants

Intended audience:
Banking and finance solicitors

6 hours (can be split into separate two-hour sessions)

Small group workshop with tutor-led discussions and practical case studies

Fee-earners who assist in arranging bank finance have to negotiate and document financial covenants which protect the lender while giving the borrower some freedom to operate their business. It is important for fee-earners to have a thorough grasp of what these covenants are attempting to achieve and why they need to be careful when drafting to ensure that the accounts cannot be manipulated to achieve a false outcome. The course will cross-reference a set of covenants to a set of accounts so that participants can see exactly what is being controlled through their drafting.

Part 1 – Accounts refresher

  • To ensure that delegates are fully up to date and confident in dealing with:
    • The main financial statements and what they tell you
    • The different GAAPs
    • Key accounting jargon / terminology that will feature in the legal documentation
    • Why and how accounts get manipulated
  • Group accounts
    • What are the various types of group entity?
    • How are group accounts prepared and presented?

Part 2 – The basic covenants

  • An overview of the types of covenant and what they seek to achieve
  • Some definitions used in calculating the covenants
    • EBITDA and calculating it from a set of accounts
      • Pensions
      • Stock options
      • Derivatives
      • Exceptional items
      • Finance leases
      • Revaluations
    • Finance charges
  • The cash flow covenant (also to consider income cover covenants)
    • Working capital adjustments
    • Provisions
    • Capital expenditure

Part 3 – More covenants

  • Excess cashflow
  • Interest cover covenants
    • Finance charges
      • Capitalised interest
      • Pensions
      • Premiums and discounts
      • Hedge accounting
      • Leverage covenants
  • Borrowings
    • Reporting the substance of transactions
    • Redeemable shares
    • Deferred purchase agreements
  • Total debt
    • Intra-group liabilities
    • Offset of cash balances
  • Loan to value covenants
  • Definition of insolvency and reviewing the position from accounts
  • Implications on disclosure of liabilities following a breach


  • Participants will appreciate the main accounting issues that need to be considered when negotiating financial covenants on behalf of clients
  • Participants will be more confident in amending the accounting aspects of financial covenant documents
  • Participants will be able to provide clients with better advice and provide extra protection in the transactions they work on

Training Team

Module Leader
Robert Mowbray

Fresh Professional Development  Ltd, The Forum, 277 London Road, Burgess Hill, West Sussex, RH15 9QU
t. 01454 550066, e. info@fdg.uk.com, w. www.freshpd.com © Fresh Professional Development Ltd. 2017

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