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Financial Management and Analysis of Projects : 7. Knowledge Management
7.13. Model Capital Structure Covenants
7.13.1. Debt Service Coverage (Version A: Historical orientation) (see 3.6.3.3)
7.13.1.1. The following is an outline for a
Debt Service Coverage 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 loan agreement.
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 an electric power project
to be carried out by a borrower that operates electric power, water
supply and telecommunications services, the covenant normally would
be drafted to apply only to the electric power 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 not incur
any Debt, unless the Free Cash Flows of the Borrower for the twelve
months prior to the date of such incurrence shall be at least
____times the Debt Service Requirements of the Borrower for the
same period on all Debt.
-
For the purposes of this Section:32
- The
term "Borrower's Operations" refers to the [identify
relevant part of the operations] operations of the Borrower.
- 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
are included.(Note: The alternative definition of incurrence
of Debt, as illustrated in the Debt-Equity Ratio Covenant
should not be used for this form of debt limitation covenant).
- The
term "Free Cash Flows" means the difference between:
-
the sum of revenues from all sources related to Operations,
after making adequate provisions for uncollectible debts,
adjusted to take account of the Borrower's [rates] [prices]
in effect at the time of the incurrence of Debt even though
they were not in effect during the twelve-month period
to which such revenues relate and Net Non-operating Income;
and
-
the sum of all expenses related to Operations including
administration, maintenance, taxes and payments in lieu
of taxes, but excluding provision for depreciation, other
non-cash operating charges, movements in Working Capital,
and interest and other charges on debt.
-
The term "Net Non-operating Income" means the difference
between
-
revenues from all sources, including extraordinary gains,
other than those related to Operations, and receipts relating
to the disposal of physical assets; and
-
expenses including taxes and payments in lieu of taxes,
and including extraordinary losses, incurred in the generation
of revenues in (v)(A) above; and payments for the purchase
of physical assets.
-
The term "Working Capital" means the difference
between Current Assets and Current Liabilities at the end
of each Fiscal Year.33
- The
term "Current Assets" means all assets which could
in the ordinary course of business be converted into cash
within twelve months, including accounts receivable, marketable
securities, inventories and prepaid expenses properly chargeable
to operating expenses within the next Fiscal Year.
- The
term "Current Liabilities" means all liabilities
which will become due and payable or could under circumstances
then existing be called for payment within twelve months,
including accounts payable, customer advances, debt service
requirements, taxes, and payments in lieu of taxes, and dividends.
- The
term "Debt Service Requirements" means the aggregate
amount of all repayments (including sinking fund payments,
and lease payments under finance leases if any), whether or
not actually paid, of, and interest and other charges on Debt.
[Interest charges which are incurred in financing capital
expenditures during development are excluded, if such charges
are capitalized. However, if the Borrower's policy is to meet
the cost from operating income, such interest charges should
be included in "Debt Service Requirements".]
- Whenever
for the purposes of this 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.
_________________________
32 The
definitions may be incorporated into the general definitions section.
33 The
definition of Fiscal Year should be incorporated into the general
definitions section as ' "Fiscal Year" means the accounting
year of the Borrower commencing on ___ and ending on the following
____ or such other period as the Borrower, with ADB's consent, designates
as its accounting year.'
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7.12.5. Breakeven Covenant | Next
7.13.1. Debt Service Coverage (Version A: Historical orientation) |
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