In 2017, more than 100 companies worldwide will default on loans. Why? For most companies, lack of a thorough debt compliance process. A failure to fully understand the agreements for the quarterly CFO Compliance Certificate can lead to an auditor citation for a SOX deficiency or material weakness. For most companies, a debt compliance process is often incomplete, unorganized, and understaffed. But it’s a process that can easily be broken down and organized into a precise and efficient program.
Debt compliance risk may be the most overlooked enterprise liability a company faces. It’s rarely mentioned in any enterprise risk list, yet, a covenant violation can shut down a company, destroy its reputation, and crater its market cap. Debt compliance risk is also a GAAP risk, a SOX risk, and a career risk. Yet, while most corporations have processes to manage risk and create efficiencies to ensure good, sound business the debt compliance process is most often overlooked and underestimated. However, one could argue, it’s the single most likely risk the company faces.
Many below-investment-grade treasurers underestimate their covenant violation risks, are not aware of the GAAP and SOX risks. They believe that if there is a covenant violation, all it takes is taking their lenders out to lunch and all will be forgiven. As a result, they invest little time and few resources to managing their debt compliance. In some cases, there may be no policy, no financial covenant stress testing, and no review of a comprehensive covenant checklist.
Yet, before Treasury talks to their lenders, it quickly goes downhill. Treasury will have to inform the CFO, the General Counsel, the CEO, the auditors about issuing an 8-K announcing the default, and possibly even their investment bankers, and develop a strategy to tell the lenders how they will cure the default. The company will quickly find that it has lost control, especially if it is public with the required 8-K notice of default.
Automating the debt compliance process allows for accurate and complete evaluations by people knowledgeable about the covenants and documents the attestations about covenant compliance with a questionnaire process. A DCS automation has six key benefits:
- All compliance issues are quickly, accurately and consistently researched with hyperlinked web pages, multi-agreement contextual searching, and knowledge-sharing
- A risk-based comprehensive covenant checklist
- An in-depth questionnaire process based upon truly at-risk covenants
- A Debt Calendar process that ensures the timely delivery of all regularly scheduled debt requirements
- No implementation or maintenance by IT
- Per a KPMG opinion, SaaS prepaid service fees (aka implementation costs) can be capitalized and amortized over the life of the contract
Debt compliance, especially for speculative grade companies, cannot be effectively done by Treasury and Legal alone due to the sheer number, complexity, and breadth of the covenants. That’s why Debt Compliance Services designed a system that reduces the probability of an unexpected technical default by 90%.
By creating checklists, dynamic questionnaires, clickable text definitions, and a process that captures and delivers expertise from key stakeholders to compliance about covenants, automation minimizes the risk that otherwise good business decisions inadvertently breach covenants. Now that’s good for business.