Commercial Banking
Measure covenant headroom
What you will learn
Convert a ratio covenant into a rupee cushion.
CFADS cushion = actual CFADS − minimum DSCR × debt service
Read the agreement for the test date, calculation scope and permitted adjustments. Compute the ratio and translate it into allowable movement in the relevant driver. Run a downside and check cures, waivers and the consequences of breach. The contractual test and the ability to pay are separate. A fictional lender requires 1.25× DSCR against ₹20 crore of service. CFADS of ₹30 crore gives ₹5 crore cushion above the ₹25 crore threshold.
A fictional lender requires 1.25× DSCR against ₹20 crore of service. CFADS of ₹30 crore gives ₹5 crore cushion above the ₹25 crore threshold.
Read the agreement for the test date, calculation scope and permitted adjustments. Compute the ratio and translate it into allowable movement in the relevant driver. Run a downside and check cures, waivers and the consequences of breach. The contractual test and the ability to pay are separate. A fictional lender requires 1.25× DSCR against ₹20 crore of service. CFADS of ₹30 crore gives ₹5 crore cushion above the ₹25 crore threshold.
Does passing a covenant prove liquidity will be adequate every day?