Massey
Massey
The costs involved in borrowing money directly from a bank are prohibitive to a number of companies. In the world of corporate finance, many chief financial officers (CFOs) view banks as lenders of last resort because of the restrictive debt covenants that banks place on direct corporate loans. Covenants are rules placed on debt that are designed to stabilize corporate performance and reduce the risk to which a bank is exposed when it gives a large loan to a company. In other words, restrictive covenants protect the banks interests; theyre written by securities lawyers and are based on what analysts have determined to be risks to that companys performance.
Here are a few examples of the restrictive covenants faced by companies: they cant issue any more debt until the bank loan is completely paid off; they cant participate in any share offerings until the bank loan is paid off; they cant acquire any companies until the bank loan is paid off, and so on. Relatively speaking, these are straightforward, unrestrictive covenants that may be placed on corporate borrowing. However, debt covenants are often much more convoluted and carefully