Module 3 · Chapter 9

Undertakings and Financial Covenants

After signing, the borrower makes promises that last until the loan is repaid: what it must report, which financial ratios it must keep, and what it must not do.

≈ 12 min read 8-question test

In this chapter

What the borrower must report to its lenders, and when
How the two financial covenants are measured and tested
What the borrower may not do without its lenders' consent

9.1Undertakings in one paragraph

An undertaking is the borrower's promise about the future, and the market also calls it a covenant. It lasts from signing until the loan is repaid. Lenders need these promises because they share none of the borrower's profits, only its losses. They cannot run the company, and demanding the money back usually comes too late, so the agreement gives them three tools:

information undertakings (clause 16), so they can see how the business is doing
financial covenants (clause 17), two ratios that warn of trouble early
general undertakings (clause 18), things Atlas may not do without consent.

Key point

Covenants are an early warning, not a punishment. A breach, or a breach that is coming, brings the borrower to its lenders while the company is still worth saving.

Also in this chapter

What Atlas must report, and when
The two ratios Atlas must keep
The definitions decide the numbers
When the ratios are tested
What Atlas may not do without consent
The negative pledge protects an unsecured loan
Baskets: freedom below a line
When a covenant is broken
Your job

Preview

The rest of this chapter opens with a free account. Every edition is free to read until 31 January. Open a free account by the end of that day and keep every edition published by then, for good. Open it from the edition home →