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Chapter 6

1.2 Security and covenants

Security

In the event of default, the lender will be able to take assets in
exchange for the amounts owing.

Fixed charge – The debt is secured against a specific asset, normally
land or buildings.

Floating charge – The debt is secured against the general assets of the
business. This form of security is not as strong.

Covenants

Specific requirements or limitations laid down as a condition of taking
on debt financing.

Examples:

Dividend restrictions – designed to prevent excessive dividend payments which may
seriously weaken the company's future cash flows.

Financial ratios – specified levels below which certain ratios may not fall, e.g. interest
cover, gearing ratio, debt/EBITDA.

Financial reports – regular accounts and financial reports to be provided to the lender
to monitor progress.

Issue of further debt – the amount and type of debt that can be issued may be
restricted. Subordinated debt can usually still be issued.

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