4.3 Particular Clauses in Loan Facility Agreements 107From the borrower’s perspective, it is important to ensure that the borrower has
the flexibility to run its business in accordance with its business plan without fal-
ling foul of the covenants. To avoid an unnecessary onerous administrative bur-
den, the borrower should ensure that the information covenants in the loan docu-
ments are consistent with its company law disclosure obligations.
From the bank’s perspective, too, some flexibility is important. Flexibility will
help avoid a constant stream of waiver requests.^94
The parties typically agree on the usual covenants but modify them by reason-
able exceptions and materiality thresholds.
Covenants, takeover defences, refinancing. Covenants reduce managerial dis-
cretion. They can also act as takeover defences. For example, they can act as a
constraint on refinancing following a leveraged buy-out (section 18.4). On the
other hand, they can also as act as a constraint on the use of pre-bid refinancing as
a takeover defence (section 18.2).
This can be illustrated by the Aker Kvaerner case. Aker Kvaerner, which later changed its
name to Aker Solutions, is a large Norwegian company which belongs to the even larger
Aker group controlled by Kjell Inge Røkke, a Norwegian tycoon. In 2002, the company had
issued subordinated bonds.^95 In 2006, Røkke decided to release capital from Aker Kvaerner
through the sale of the company’s Pulping and Power division and the following distribu-
tion of profits form the sale as dividends to the company’s shareholders. The company
therefore asked the bondholders to amend the agreements to permit a restructuring of Aker
Kvaerner’s debt at parent company level and to lift restrictions in the dividend covenant.
Holders of Aker Kvaerner’s subordinated loan voted against the company’s request.
Covenants: financial ratios. Financial ratios are likely to comprise, among other
things, a combination of profitability to debt and/or interest and cash flow tests.
Financial ratios enable lenders to monitor the financial performance of the bor-
rower. The ratio levels are set by reference to the projected financial performance
of the borrower at the time the loans are advanced and will enable the lenders to
test whether the creditworthiness of the borrower group has deteriorated from the
creditworthiness projected at the time of initial advance.
Financial ratios serve lenders in many ways. First, as a failure to maintain fi-
nancial ratios would give rise to an event of default, they protect lenders in the
(^94) Gayle C, op cit, p 304: “For example, it needs to be considered whether joint ventures
will be a necessary part of the business development (these are usually restricted) or
whether there will be an employee share option scheme or issue of shares to incoming
management (the issue of shares may not be allowed) or whether future business acqui-
sitions are contemplated (investments will be constrained). The borrowers also need to
consider its funding arrangements for overdraft facilities and payment of employee sala-
ries as well as its general banking arrangements (for example, without an express excep-
tion, group account netting arrangements would not be permitted).”
(^95) Kvaerner Subordinated Open Bond Issues 2002/2011: ISIN NO 001 012883.8
(AKVER56) – NOK. ISIN NO 001 012884.6 (AKVER56) – USD. ISIN NO 001
012885.3 (AKVER56) – EUR.