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Financial Management and Analysis of Projects : 7. Knowledge Management : 7.12. Model Operating Covenants
7.12.5. Breakeven Covenant (see 3.6.2.6)
7.12.5.1. The following is an outline for a Breakeven Ratio covenant for use
in a loan agreement. It is intended as a guide only. It is the responsibility
of the OGC to determine, in consultation with the mission leader
and financial analyst, the precise wording for inclusion in the
legal agreements. In cases of borrowers conducting multiple operations,
the text of the covenant should define which operations are to be
subject to performance measurement. As an example, in a sewerage
project to be carried out by a borrower that also operated water
supply services, the covenant normally would be drafted to apply
only to the sewerage operations.
Section _______.
- For
the purposes of this Loan Agreement, all financial calculations,
ratios and financial covenants shall be applied in respect of
the Borrower's Operations only.
-
Except as ADB shall otherwise agree, the Borrower shall produce
for each of its fiscal years after its fiscal year ending on____________,
total revenues equivalent to /or not less than the sum of (i)
its total operating expenses; and (ii) the amount by which debt
service requirements exceed the provision for depreciation.31
-
Before (date/month) in each of its fiscal years, the Borrower
shall, on the basis of forecast prepared by the Borrower and satisfactory
to ADB, review whether it would meet the requirements set forth
in paragraph (a) in respect of such year and the next following
fiscal year and shall furnish to ADB the results of such review
upon its completion.
Paragraph
(d): Option 1: Where the borrower or government has discretion to
adjust tariffs/rates:
-
If any such review shows that the Borrower would not meet the
requirements set forth in paragraph (b) for the Borrower's fiscal
years covered by such review, the Borrower shall promptly take
all necessary measures (including without limitation, adjustments
of the structure or levels of its rates (prices)) to meet such
requirements.
Paragraph
(d): Option 2: Where there is an independent regulator in place
(or where it is anticipated that an independent regulator may be
established during the project implementation period):
-
If any such review shows that the Borrower would not meet the
requirements set forth in paragraph (b) for the Borrower's fiscal
years covered by such review, the Borrower shall promptly take
all necessary measures (including without limitation, filing applications
with the [name of regulator] seeking a tariff/rate increase) to
meet such requirements.
-
If any such review shows that the Borrower would not meet the
requirements set forth in paragraph (b) for the Borrower's fiscal
years covered by such review, the Borrower shall promptly take
all necessary measures (including without limitation, filing applications
with the [name of regulator] seeking a tariff/rate increase) in
order to meet such requirements.
-
For purposes of this Section:
-
The term "total revenues" means the sum of total
operating revenues and net non-operating income, but excludes
all government grants, subsidies and transfers income.
-
The term "total operating revenues" means revenues
from all sources related to operations, after making adequate
provisions for uncollectible debts.
-
The term "net non-operating income" means the difference
between:
-
revenues from all sources other than those related to
operations; and
-
expenses, including taxes and payments in lieu of taxes,
incurred in the generation of revenues in (iii)(a) above.
-
The term "total operating expenses" means all expenses
related to operations, including administration, adequate
maintenance, taxes and payments in lieu of taxes, and provision
for depreciation on a straight-line basis at a rate of not
less than ______ percent per annum of the average current
gross value of the Borrower's fixed assets in operation, or
other basis acceptable to ADB, but excluding interest and
other charges on debt.
- The
average current gross value of the Borrower's fixed assets
in operation shall be calculated as one half of the sum of
the gross value of the Borrower's fixed assets in operation
at the beginning and at the end of the fiscal year, as valued
from time to time in accordance with sound and consistently
maintained methods of valuation satisfactory to ADB.
-
The term "debt service requirements" means the aggregate
amount of repayments (including sinking fund payments, if
any) of, and interest and other charges on, debt.
-
The term "debt" means any indebtedness of the Borrower
maturing by its terms more than one year after the date on
which it is originally incurred.
-
Debt shall be deemed to be incurred: (a) under a loan contract
or agreement or other instrument providing for such debt or
for the modification of its terms of payment on the date of
such contract, agreement or instrument; and (b) under a guarantee
agreement, on the date the agreement providing for such guarantee
has been entered into. Financial liabilities incurred by a
borrower who is a lessee under finance leasing agreements
may also be included as debt.
-
Whenever for the purposes of the Section it shall be necessary
to value, in terms of the currency of the Guarantor, debt
payable in another currency, such valuation shall be made
on the basis of the prevailing lawful rate of exchange at
which such other currency is, at the time of such valuation,
obtainable for the purposes of servicing such debt, or, in
the absence of such rate, on the basis of a rate of exchange
acceptable to ADB.
-
The terms "operations" or operating" refer
to the [identify relevant part of the operations] operations
of the Borrower.
_________________________
31 For
some borrowers, which enter into this type of covenant, depreciation
may not be applicable.
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7.12.4. Operating Ratio | Next
7.13. Model Capital Structure Covenants |
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