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Financial Management and Analysis of Projects :
7. Knowledge Management
7.14. Model Liquidity Covenants
7.14.1. Current Ratio (see 3.6.4.2)
7.14.1.1. The following is an outline for a Current 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 an electric
power project to be carried out by a borrower that operated 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 maintain
a ratio of current assets to current liabilities of not less than______.
-
Before (date/month) in each of its fiscal years, the Borrower
shall, on the basis of forecasts prepared by the Borrower and
satisfactory to ADB, review whether it would meet the requirements
set forth in paragraph (b) 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
(c): 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)) in order to meet such requirements.
Paragraph
(c): 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) in
order to meet such requirements.
-
For the purposes of this Section:
-
The term current assets means cash, 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 repayments (including sinking fund payments, if
any) of, and interest and other charges on, debt.
-
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.
-
The terms operations or operating refer
to the [identify relevant part of the operations] operations
of the Borrower.
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7.14.1. Current Ratio |
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