Structuring
Understanding Payout EBITDA and Financial Covenants
This quiz is designed to test your knowledge of Payout EBITDA and the intricacies of financial covenants essential for managing business risks.
Participate to explore:
- Definitions and applications of Payout EBITDA
- Best practices in setting financial covenants
- Risk management strategies for financial facilities
Which of the following is a definition of Payout EBITDA?
€¢ The amount of profit required to meet all cash obligations
€¢ The amount of profit required to meet all debt obligations
€¢ The amount of profit required to meet dividend obligations
€¢ The amount of profit required to fund capital expenditure
You have agreed to set both a Profit and Cash Flow covenant for a new facility. Which one of the following regarding test levels is correct?
€¢ Set the Profit covenant to breach before the Cash Flow covenant
€¢ Set the Cash Flow covenant to breach before the Profit covenant
€¢ Set the Profit and Cash Flow covenants to breach at the same time
€¢ It does not normally matter which of the two covenants is set to breach first
Which one of the following statements regarding covenants test levels is correct?
€¢ The test level must be set at the same level for the duration of the facility
€¢ Ratcheted covenants will never be appropriate for a business in a turnaround situation
€¢ Setting a ratcheted covenant may be particularly appropriate for a start-up business
€¢ The test level should be set above the customer forecasts at the start to ensure close monitoring of the facility
You have set a monitoring formula to help you manage risk on an overdraft facility. Which one of the following statements is correct?
€¢ If the facility regularly exceeds the terms of the monitoring formula, review with the customer and consider appetite for continuing the facility
€¢ Amend the facility limit on the account so that it reflects the level of asset cover afforded by the monitoring formula calculations
€¢ Where a facility is in excess of the agreed level of asset cover you can use the rights provided by the monitoring formula to demand repayment of the facility
€¢ Protect the Bank’s position by issuing a waiver letter whenever the overdraft exceeds the level of cover afforded by the monitoring formula
Which one of the following is normally the best measure of the ability of the business to service and repay debt?
€¢ EBITDA to Debt Service Liability
€¢ CFADS to Debt Service Liability
€¢ EBITDA to Interest Costs
€¢ Gross Borrowing to EBITDA
Which one of the following best describes when you should normally consider setting Financial Covenants to help mitigate risk?
€¢ All facilities including Overdrafts and Loans
€¢ Committed facilities in excess of £1M
€¢ On Demand Overdrafts in excess of £1M
€¢ All Loan facilities with a term in excess of 12 months
Your customer has breached a covenant test level. Which one of the following statements is correct?
€¢ Always issue a reservation of rights letter to protect the Bank’s position
€¢ If you intend to renegotiate the loan terms and conditions you must first issue a formal demand letter
€¢ A waiver letter must be issued on every occasion a customer is in breach before other action is considered
€¢ Ignoring a covenant breach even if the position is quickly adjusted is likely to weaken the Bank’s position in respect of any subsequent breaches
What is the principle benefit from calculating Payout EBITDA? It confirms how much profit the business must generate to meet
€¢ All cash obligations of the business
€¢ All cash obligations of the business excluding debt service costs
€¢ All cash obligations of the business prior to paying tax commitments
€¢ All cash obligations of the business excluding capital repayments on debt
What is meant by debt headroom?
€¢ Difference between short and long term debt levels
€¢ Total Balance Sheet debt less the working capital requirement
€¢ Total debt that the business can service and repay from existing profits
€¢ Gap between existing debt levels and the quantum of debt the business is able to service
Which one of the following is the best indicator of how much debt a business is carrying & if that debt is within acceptable limits?
€¢ EBITDS to Debt Service Liability
€¢ CFADS to Debt Service Liability
€¢ EBITDA to Interest Costs
€¢ Gross Borrowing to EBITDA
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