Building the First Lender Reporting Pack and Covenant Certificate

The facility closes, everyone is pleased, and the credit agreement goes into a drawer. Some months later a relationship manager emails asking for the quarterly reporting package and the compliance certificate, and somebody in the company opens a fifty page document for the first time to find out what those are.

That is the normal sequence and it is recoverable, but it costs a week and it starts the relationship on the wrong footing. The alternative is to spend two hours the day the facility closes doing the extraction below, and then to build the pack once so that every subsequent quarter is an assembly job.

All figures in the worked example are Canadian dollars and are illustrative.

Step 1: extract the agreement into one page

Read the credit agreement with a highlighter and pull the following into a single reference sheet. Everything here is contractual and specific to your agreement, so nothing on this page can be inferred from what other companies have.

Extract	Where it usually lives	Why it matters
Every financial covenant, quoted verbatim	Financial covenants section	The wording is the test, not the ratio name
The definition of every defined term used inside those covenants	Definitions section, sometimes an appendix	This is where the actual arithmetic lives
Testing frequency and testing date for each covenant	Financial covenants section	Some are quarterly, some annual, some on a rolling twelve month basis
Reporting deliverables and the days allowed after each period end	Affirmative covenants or a reporting schedule	Usually different for quarterly, annual and audited or reviewed statements
Required form of financial statements	Reporting schedule	Compilation, review or audit, and under which framework
The compliance certificate form itself	Usually a schedule at the back	Do not invent your own. Use theirs.
Non-financial covenants	Affirmative and negative covenants	Insurance, capital expenditure limits, distributions, additional debt, asset disposals, change of control
Notice obligations and their triggers	Affirmative covenants	Litigation, material adverse change, default, sometimes a key person departure
Cure rights and grace periods	Events of default	What you have and how long, before a breach becomes a default
Who signs the certificate	The certificate form	Frequently a named officer, and frequently not the person who prepared it

Put that one page in front of the person who will do the work every quarter. Most covenant surprises come from a company that knew the ratio and did not know the definition.

Step 2: understand that definitions, not accounting, drive the result

This is the point of the whole exercise, so it deserves numbers.

Take a company with the following results for a trailing twelve month period.

Input	Amount
EBITDA as the agreement defines it	1,240,000
Cash income taxes paid	148,000
Unfunded capital expenditure	90,000
Scheduled principal repayments	420,000
Interest expense	138,000
Operating lease payments	96,000
Current assets	2,140,000
Current liabilities	1,315,000
Of which, postponed shareholder loan	210,000
Funded debt	2,480,000

A common form of debt service coverage takes EBITDA less cash taxes less unfunded capital expenditure, over scheduled principal plus interest. On these numbers the numerator is 1,240,000 less 148,000 less 90,000, which is 1,002,000. The denominator is 420,000 plus 138,000, which is 558,000. The ratio is 1.80 times.

Now change one definition. Some agreements include operating lease payments in fixed charges. The denominator becomes 654,000 and the ratio becomes 1.53 times. Nothing about the business changed. The company either passed comfortably or is close to a covenant that is frequently set at 1.25 times, depending entirely on a clause it may never have read.

The working capital ratio behaves the same way. Current assets of 2,140,000 over current liabilities of 1,315,000 gives 1.63 times. If the agreement permits the postponed shareholder loan to be excluded from current liabilities, which is a common accommodation where a postponement agreement exists, the denominator becomes 1,105,000 and the ratio becomes 1.94 times.

Funded debt to EBITDA is 2,480,000 over 1,240,000, or 2.00 times, and the definitional question there is what counts as funded debt: whether the operating line is included, whether capital lease obligations are included, and whether shareholder debt is included or excluded.

Three ratios, three definitional forks, and in each case the accounting was never in question. Build your calculation from the agreement’s definitions and show the build. Never compute a covenant from a ratio you remember the name of.

Step 3: the pack, page by page

The pack below is what we build. Pages 1 to 6 go to a lender. Pages 1 to 9 go to a board or an investor group, because those readers are governing rather than monitoring and need the forward view.

Page	Content	Notes
1	Cover and contents	Entity legal name, period, basis of preparation, and who prepared and reviewed it
2	Covenant compliance summary	Each covenant, the threshold, the actual, the headroom, and a pass or fail. This page goes first because it is the page they open.
3	Balance sheet, current period and comparative	Prior year end and prior quarter, not just prior year
4	Income statement, period and year to date, with comparatives	Same columns every quarter, forever
5	Cash flow statement	Prepared consistently with the annual statements
6	Notes on anything unusual	One page. Written in sentences. This is where you get ahead of the question.
7	Aged accounts receivable and aged accounts payable	Summary by bucket, plus any balance above a concentration threshold named individually
8	Rolling forecast summary	Closing cash and headroom by period. See the 13-week cash forecast piece for the underlying model.
9	Operating metrics	Three to six, the same ones every quarter, chosen by the business rather than by finance

Two rules make the pack useful rather than merely complete.

The columns never change. A reader who has seen four packs should be able to compare page 4 across all four without re-reading the headings. Adding a column because it flatters this quarter destroys that, and destroys it permanently, because now every prior period has to be restated to compare.

Page 6 is not optional and is not a formality. If gross margin moved four points, page 6 says why, in two sentences, before anyone asks. A pack that explains its own variances is read as competent. A pack that leaves them to be discovered is read as evasive, even when it is only incomplete.

Step 4: the compliance certificate

Use the form in the agreement. If the agreement has no prescribed form, build one containing all of the following and get it accepted in writing before the first submission.

• Entity legal name and the period being certified.
• A statement of the basis of preparation, naming the reporting framework.
• Each covenant, quoted as defined, with the threshold.
• The calculated result for each, with the full build shown line by line rather than a single number.
• A statement as to whether any event of default has occurred and is continuing.
• Confirmation of compliance with the non-financial covenants that are capable of being confirmed: insurance in force, statutory remittances current, no additional indebtedness incurred, no distributions outside permitted amounts.
• Signature block for the officer the agreement names.

Showing the build matters more than it seems. A certificate that reports 1.80 times invites a question. A certificate that shows 1,240,000 less 148,000 less 90,000 over 420,000 plus 138,000 answers it in advance, and it also creates a record of the definitional interpretation you applied, which is the thing you will want in your file if the interpretation is ever queried.

Step 5: the reporting calendar

Structure it relative to period end rather than to dates, because the agreement does, and because your fiscal calendar may not be a December one.

Deliverable	Timing anchor	Owner	Prepared from
Internal covenant estimate	Within the close, before the pack is assembled	Controller	Draft trial balance
Quarterly pack and certificate	The number of days after quarter end stated in the agreement	Controller prepares, named officer signs	Closed trial balance
Annual financial statements	The number of days after year end stated in the agreement, in the form required	Practitioner issues, company delivers	Year end file
Annual budget or forecast, where required	Frequently before the start of the new year	Owner and controller	Planning cycle
Insurance confirmation	Annually, on renewal	Office manager	Broker certificate
Notice of a triggering event	Within the notice period in the agreement, from the date of the event	Owner	The event

The first row is the one that changes outcomes. Estimate the covenant during the close, from the draft trial balance, before the pack exists. If a covenant is going to be tight, you want to know while there is still time to have a conversation, not on the day the certificate is due. This is not about changing the number. It is about not surprising a lender, which is the single most valuable thing a borrower can avoid doing.

Step 6: the disclosure rule

Bad news goes early and in writing, from the company, before the lender finds it. A breach that is disclosed with a plan is a conversation about a waiver. The same breach discovered by a relationship manager reading a certificate is a conversation about whether the company knew.

Write the rule down and give it to whoever prepares the pack:

Situation	Action	Timing
Covenant projected to fail at the next test	Tell the lender, with the cause and the plan	As soon as the projection is credible, not at the test date
Covenant failed at a test	Formal notice as the agreement requires, with a waiver request if you have one to make	Within the agreement’s notice period
Material customer loss, litigation, insurance lapse, key departure	Check the notice obligations, then disclose	Per the agreement
A restatement or a correction to a prior pack	Reissue the affected pages, marked as reissued, with a note	Immediately
Nothing unusual	Say so explicitly on page 6	Every quarter

Board pack, where it differs

If the same pack is going to a board or an investor group, three things change. Page 2 becomes a one page summary of the quarter written in sentences rather than a covenant table, because directors are governing and need a narrative before a ratio. Pages 8 and 9 carry more weight, because the forward view is the part a board can actually act on. And a decisions page is added at the front listing what is being asked of the board this meeting, which stops a governance meeting from becoming a reporting meeting.

What we do not do

We do not prepare a set of figures for a lender that differs from the set the company manages by. We do not compute a covenant from a standard formula without reading the agreement’s definition of every term in it, and we do not interpret an ambiguous definition without putting the interpretation to the lender in writing. We do not add a metric to page 9 because a quarter went well. And we do not sign the certificate; the agreement names an officer of the company for a reason, and the preparer and the signer being different people is itself part of the control.