Asc 842 Credit Agreement

Financial pacts. Companies often have to meet certain financial ratios on a regular basis, such as a net leverage ratio in credit contracts and high-yield bonds. Compliance with these agreements can be measured either at the end of each quarter or in pro forma after the new debt. For example, a typical ratio measures the level of consolidated debt at year-end relative to consolidated EBITDA in the last four months of activity. Depending on the applicable definition of debt, the new leasing accounting rules can result in a significant increase in balance sheet debt for many borrowers (with a limited impact on EBITDA), which could lead to problematic compliance with financial ratios. Before we look at the new standards, there is a threshold question as to the definition of GAAP in a credit contract. In general, we see two versions. The GAAP “as from time to time in force” would automatically incorporate new accounting standards, while GAAP “as on the closing date” freezes GAAP for all purposes of the credit agreement. Although GAAP may be “frozen in time” on the reference date for credit contracts, the following analysis assumes that GAAP changes will be included in the calculations of EBITDA and other financial obligations and ratios in the credit contract (i.e., the “from time to time” standard). Unlike loans under credit contracts, mechanisms for modifying high-yield bonds can be too complicated to be applied effectively.

In addition, third parties (such as rating agencies and lenders) often rely on rent footnotes to determine future contractual obligations or compliance with credit contracts. Credit rating agencies and financial analysts already assess debts that are and generally include this amount in the calculation of financial debts or liabilities for rating purposes. Debt pacts. Credit contracts and high-yield bonds often limit the amount of debts or pledges admitted by debtors, subject to certain authorized baskets, including a specific basket for leasing contracts considered to be capital or leasing contracts or on the basis of a borrower`s gaap balance sheet. As the new accounting rules on leasing come into effect and operating leases are taken into account on the balance sheet, borrowers with large operational leases should be required to pay particular attention to the criteria of the pre-negotiated leasing basket and to amend these provisions to increase the basket or exclude operating leases. , reclassify existing debts to find additional capacity or risk a potential loss.

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