The bank`s principal and interest will be repaid from the future profit flow before interest and taxes (EBIT). (Normally, a bank calculates EBIT as revenue minus selling, general and administrative expenses.) Therefore, the bank wants to know the magnitude of the business risk – that is, how much the future EBIT flow could vary. Another important element is an understanding of the borrower`s sector, both the strengths and weaknesses of the company and its overall strategy. (While EBIT is available to cover interest expenses, non-tax-deductible capital payments must be paid from the net profit stream. In addition, annual capital payments cannot be made from cash flow unless the borrower can waive the replacement of depreciated fixed assets.) Policy control applies throughout the line. With a company with a high business risk and a weak balance sheet, the bank will try to contain strategic movements that it deems inappropriate. More eligible candidates will experience fewer restrictions if the banker doesn`t like the company`s strategy, but is faced with more sensitive triggers that can be triggered quickly if the strategy fails. Mandatory costs: This formula, which covers the costs incurred by banks in complying with their regulatory obligations, is rarely negotiated. It is provided as a timeline for the installation agreement. However, the interest rate should only apply to LIBOR-based facilities and not to base interest rate facilities, as a bank`s base interest rate already contains a sum reflecting mandatory costs. During negotiations, the manager should strive to minimize the impact of restrictions that may unreasimple management or easily cause a breach before the company`s financial situation seriously deteriorates. The most useful tool for determining if the restrictions are too strict is your financial forecast. Suppose the Bank wants to set a long-term debt ceiling of 0.75 to 1 and you predict that next year`s profit will be $3 million.
long-term debt, $15 million; and equity, $21 million. You can imagine that a drop of more than $1 million in expected net income would result in a loss (0.75 = $15 million/X; X = US$20 million; necessary decrease in net income = $21 million – US$20 million or $1 million). Given this margin, you need to decide on the probability of such a change in returns. Bank credit agreements include a section on representations and guarantees, which normally states that the borrower: LIBOR: The London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks can lend unsecured funds to other banks. It is usually defined for the purposes of a facility agreement by referring to a set of screens (usually the British Bankers Association interest settlement rate for the currency and the period in question) or the base reference rate, which is the average rate at which the bank can obtain information about the London interbank market. The existence of a trade union has no influence on certain other provisions of an establishment agreement. For example, there will also be a definition of “majority lenders” whose consent is required for certain acts. It is normal that this definition is two-thirds of unionized banks by referring to the amount of their share in the loan. The borrower should ensure that all syndicated banks are “eligible banks” for the above reasons and, again, appropriate collateral may be appropriate. According to electricity EBIT, the company`s balance sheet is the main financial ratio, as assets are the secondary source of repayment for the bank if revenues are not sufficient to repay the loan. .