Debt Compliance Diagnostic – How Good is Your Process?

Many companies believe that all that is necessary is calculating the ratios and any permitted baskets, ignoring the 95% of the other covenants in their debt agreements.

Evaluate your debt compliance on these components below to see how good your debt compliance really is:

Component Poor Somewhat Adequate Better Best-in-Class
How Debt Compliance is Organized & Authorized No written procedures or policy. Written procedures but no policy. Explicitly included at some length in the quarterly SOX process. CFO-approved policy with objectives and Compliance Team and SME responsibilities.
Responsible Departments 100% Treasury. Treasury and Legal. Treasury, Legal and some SMEs. Treasury, Legal and many non-Treasury SMEs.
Debt Agreement Repository Incomplete set of debt agreements. All agreements in one location. Some may be unconformed for amendments. And all agreements are conformed. All agreements converted to hyperlinked web pages with consolidated multi-agreement searching.
Financial Ratios      (if at risk)
Quarterly calculations. Quarterly calculations with stressing/forecasting. Monthly/quarterly calculations. Monthly/quarterly calculations, stressing and forecasting.
Permitted Baskets    (if at risk)
No review. Calculated quarterly. Monthly/quarterly calculations. Controlling permitted baskets analysis. Treasury controls over new baskets.
All Other Covenants (aka Non-Financial Covenants) No covenant checklist. List of the senior debt’s major covenants. List of the major debts’ major covenants. Comprehensive, risk-based list of all unique agreements.
Quarterly Non-Financial Covenant Review No review or a review of just the agreements. Undocumented covenant list review. Emails with questions or excerpts. Not prospective. Retro- and prospective risk-based, web questionnaires with issue reporting and audit trail.
Scheduled Deliverables No list of due dates. Personal Excel or Outlook calendars. Departmental calendar of all deliverables. Web calendar workflow process with assigned tasks and email reminders and notifications.
Component How Debt
Compliance is
Organized &
Authorized
Poor No written
procedures or
policy.
Somewhat
Adequate
Written
procedures but
no policy.
Better Explicitly included
in quarterly SOX
compliance
process.
Best in
Class
CFO-approved
policy with
objectives and
Compliance Team
and SME
responsibilities.
Component Responsible
Departments
Poor 100% Treasury.
Somewhat
Adequate
Treasury and
Legal.
Better Treasury, Legal
and some SMEs.
Best in
Class
Treasury, Legal
and many non-
Treasury SMEs.
Component Debt
Agreement
Repository
Poor Incomplete set
of debt
agreements.
Somewhat
Adequate
All agreements in
one location.
Some may be
unconformed for
amendments.
Better And all
agreements are
conformed.
Best in
Class
All agreements
converted to
hyperlinked web
pages with
consolidated
multi-agreement
searching.
Component Financial
Ratios (If at risk)
Poor Quarterly
calculations.
Somewhat
Adequate
Quarterly calcs
with stressing/
forecasting.
Better Monthly/quarterly
calculations.
Best in
Class
Monthly/quarterly
calculations, stressing
and forecasting.
Component Permitted
Baskets
Poor No review.
Somewhat
Adequate
Calculated quarterly.
Better Monthly/quarterly
calculations.
Best in
Class
Controlling permitted
baskets analysis.
Treasury controls
over new baskets.
Component All Other
Covenants
(aka Non-
Financial
Covenants)
Poor No covenant
checklist.
Somewhat
Adequate
List of the
senior debt’s
major covenants.
Better List of the
major debts’ major
covenants.
Best in
Class
Comprehensive,
risk-based list
of all unique
agreements.
Component Quarterly
Non-Financial
Covenant
Review
Poor No review or a
review of just
the agreements.
Somewhat
Adequate
Undocumented
covenant list
review.
Better Emails with
questions or
excerpts. Not
prospective.
Best in
Class
Retro and
prospective risk-
based, web
questionnaires with
issue reporting and
audit trail.
Component Scheduled
Deliverables
Poor No list of due
dates.
Somewhat
Adequate
Personal Excel or
Outlook calendars.
Better Departmental
calendar of all
deliverables.
Best in
Class
Web calendar
workflow process
with assigned
tasks, email
reminders and
notifications.

Next Steps

1. Default risk is significant for speculative grade companies. See the latest S&P analysis.

2. A default is not trivial. Learn how the consequences of a default can cascade into a disaster.

3. If you are taking too much risk in your debt compliance, ask for a demo of our services.

4. Ask for pricing so you can put improving your debt compliance in your 2020 objectives and budget.