Loan Covenant

Loan Preserver (Value of Covenants)

Loan Products Special Report

Mariarosa Verde

Submitted by: Nikka Beatriz C. Leduna

Submitted to: Mrs. Ma. Grace Baysa

Abstract

This reaction paper will discuss about what loan covenant is about including its nature and function. In addition to that, explicit and implicit protections of covenants is discussed. It also states the relevance of the study of loan covenants in the realm of academe, banks, lending institution and the like.

Loan covenant in Philippine setting is also discoursed in this paper. It is important to be knowledgeable about covenants given that some banks and institutions implement loan covenants.

Keywords: implicit protection, explicit protection, Philippine setting, relevance

The article is about Fitch IBCA’s regarding on bank loan preserve and value of covenants. A covenant promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. Covenants in finance most often relate to terms in a financial contracting, such as loan decimation stating the limits at which the borrower can further lend or other such stipulations. Covenants are put in place by lenders to protect themselves from borrowers defaulting on their obligations due to financial actions detrimental to themselves or the business. Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender. Bank loans’ foundation in rating borrower’s capacity is the credit analysis namely business profile, financial status, operating performance and industry position. There are three primary features which impact the notching process which are the capital structure, collateral and covenants. The covenant do not change credit profile yet it safeguards loan terms and ensures that both parties are aware of potential risks. Covenants are most crucial in higher loan ratings.

One of the major concern of the article is the explicit protection of the...