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Past and present economic crises are increasingly influencing the granting of loans by credit institutions. This paper deals with the question of what effect the "covenant" instrument has on the lending process, in what form it is used and what the consequences are if these contractual agreements are breached. It then establishes a link to practice and explains the relevance of covenants for regionally orientated credit institutions.
Today, covenants refer to contractual ancillary agreements in credit agreements that are agreed individually between lender and recipient and are intended to take both sides of interest into account. The aim of the lending bank is to minimize its credit default risk through regular controlling and early information about the developments of the company to be financed. In contrast, the borrower is interested in maintaining the freedom of decision and development in his company and in securing the economic conditions to such an extent that he is not confronted with the consequences of terminating a contract.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Basics of Covenants
- Definition
- Types of Covenants
- Information Covenants
- General Covenants
- Financial Covenants
- Covenants in credit agreements
- Mode of action from the creditors' point of view
- Risk criteria
- Yield criteria
- Control criteria
- Disadvantages of covenants for creditors
- Sanctions for breach of covenants
- Mode of action from the creditors' point of view
- Use in practice
- Use at savings banks
- Use in the cooperative association
- Use from the point of view of borrowers
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This term paper explores the role of "covenants" as a risk management tool in lending to medium-sized companies. It aims to understand how covenants contribute to creditor protection and their relevance in the practical lending process.
- Definition and types of covenants
- The impact of covenants on creditors and borrowers
- The use of covenants in practice by various credit institutions
- The role of covenants in mitigating credit default risk
- The benefits and drawbacks of covenants for both creditors and borrowers
Zusammenfassung der Kapitel (Chapter Summaries)
The introduction sets the context by highlighting the importance of covenants in the current economic climate. It explains the need for creditor protection measures in the wake of recent financial crises.
Chapter 2 delves into the basics of covenants, providing a definition and outlining the different types. It discusses the historical evolution of covenants from informal agreements to written contracts.
Chapter 3 examines the role of covenants in credit agreements, focusing on their impact from the creditor's perspective. It discusses the various criteria used to assess risk, yield, and control. The chapter also touches upon the potential disadvantages of covenants for creditors and the consequences of breaching covenants.
Chapter 4 explores the use of covenants in practice by different types of credit institutions, including savings banks and cooperative associations. It also examines the perspective of borrowers and their experiences with covenants.
Schlüsselwörter (Keywords)
The key terms and concepts explored in this work include covenants, credit agreements, risk management, lending, medium-sized companies, creditor protection, financial covenants, information covenants, general covenants, and credit default risk. The paper examines the practical application of covenants in the context of financial institutions and borrower relationships.
- Quote paper
- Xenia Hamburg (Author), 2012, Covenants in credit agreements, Munich, GRIN Verlag, https://www.grin.com/document/1466174
