The security provisions and protective covenants specified by a term loan agreement are often determined by the borrower’s credit standing: the weaker the credit standing, the more restrictive the protective covenants.
In general, security requirements apply more often to intermediate -term loans than to short -term loans, due to the fact that longer-term loan contracts tend to have more default risk. Security provisions are also dependent on the size of the borrowing firm. For example, term loans to small firms tend to be secured more often than term loans to large firms, although there is an increasing tendency for all bank -oriented term loans to be secured.
The sources of security for a term loan include the following:
An affirmative loan covenant is a portion of a loan agreement that outlines actions the borrowing firm agrees to take during the term of the loan. Typical affirmative covenants include the following:
A negative loan covenant outlines actions that the borrowing firm’s management agreesnot to take without prior written consent of the lender. Typical negative covenants include the following:
Rather than requiring or prohibiting certain actions on the part of the borrower, restrictive loan covenants merely limit their scope. These are typical restrictive covenants:
And, finally, a firm that has outstanding long -term debt may be restricted as to the amount of debt it can retire without also retiring a portion of the term loan.
These restrictions are quite common, but the list is not all -inclusive. For example, a standard loan agreement checklist published by a large New York City bank lists 34 commonly used covenants. In general, covenants included in a loan agreement are determined by the particular conditions surrounding the granting of the term loan, including the credit record of the borrower and the maturity and security provisions of the loan.
All term loans have default provisions that permit the lender to insist that the borrower repay the entire loan immediately under certain conditions. The following are examples:
A borrower who commits any of these common acts of default will not necessarily be called on to repay a loan immediately, however. Basically, a lender will use a default provision only as a last resort, seeking in the meantime to make some agreement with the borrower, such as working out an acceptable modified lending plan with which the borrower is more able to comply.Normally, a lender will call a loan due only if no reasonable alternative is available or if the borrower is facing near -certain failure.
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Financial Management Tutorial
The Role And Objective Of Financial Management
The Domestic And International Financial Marketplace
Evaluation Of Financial Performance
Financial Planning And Forecasting
The Time Value Of Money
Risk And Return On At&t Common Stock
Fixed-income Securities: Characteristics And Valuation
Common Stock: Characteristics,valuation, And Issuance
Capital Budgeting And Cash Flow Analysis
Capital Budgeting: Decision Criteria And Real Option Considerations
Capital Budgeting And Risk
The Cost Of Capital
Capital Structure Concepts
Capital Structure Management In Practice
Working Capital Management
The Management Of Cash And Marketable Securities
Management Of Accounts Receivable And Inventories
Lease And Intermediate-term Financing
Financing With Derivatives
Internationan Financial Management
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