DCS Covenant Checklist℠

A Comprehensive Risk-Evaluated Checklist

We do not waste valuable respondent time by asking about all covenants every quarter or about covenants that aren’t (yet) applicable or repeatedly asking the same covenant that is in several agreements. When we develop your comprehensive covenant checklist, we determine:

  • The risk and consequences of breaching each covenant to evaluate whether compliance needs to be reviewed quarterly, annually or not at all.
  • The independent covenants that if triggered, require compliance with follow-on, dependent covenants in the same agreement.
  • The controlling covenants that have identical or looser subordinated covenants in other agreements.

Nor do we waste respondent time by asking questions that include the covenants’ pre-conditions, exceptions, and post-conditions. No one can accurately and reliably interpret a condensed snippet of a covenant paragraph without the context of the entire agreement. Doing so causes false positives, which is exactly what you don’t want in any compliance process.

Instead, we write simple yes/no retrospective and prospective questions about the covenant’s required or prohibited action. We ask:

  • What are the facts of what happened or didn’t happened?
  • And would the facts change in the foreseeable future?

Our reports link directly to covenant text in the DCS Debt Manager℠ generating the question. It’s then the Compliance Team’s job to evaluate the facts against their interpretation of the covenant text to determine how the facts should be managed.  Our process generates false positives, which is exactly what you do want in a compliance process.

For example, we do not ask “Was there a material asset sale?”.  How could any respondent really know what is material? Instead, we ask the respondent to report the details of any asset sale for the Compliance Team to evaluated, including other asset sales. If there is an asset sale,  then we we ask the asset sale’s dependent covenants, such as reporting to lenders, providing a reinvestment plan, etc.