Did you know many CFOs sign the quarterly certificate without a process that confirms and documents the compliance with all of the agreements’ covenants? Add to that, most companies have difficulties accurately understanding and interpreting their agreements in the first place. As a result, firms are forced to spend more money for legal bills and risk divergent interpretations and dedicate more time answering repetitive questions to avoid the devastation of default. Multiply all that by the number of debt agreements an organization has, and it’s a nightmare.
While volatility in emerging market financial sectors continues, it’s paramount that organizations have a reliable process in place to confirm and document debt compliance. While many organizations lean on in-house solutions, such as checklists, it creates an unreliable process because the checklist is often incomplete – focusing only on a few affirmative and negative covenants sections of the agreements. In addition, in-house processes often ignore “minor” covenants because it’s assumed the lenders will forgive a company for small violations. That’s scary considering the consequences of default – public disclosure, stock price craters, loss of control to the lenders and auditors, and customer, vendor and employees concerns.
Understandably, calling a default is a sticky situation – as soon a firm finds it has a covenant violation, the Treasurer, CFO, General Counsel, and CEO need to know if the violation is material enough to report the violation to the lenders immediately. Not reporting a material violation means that the firm can be liable for fraud.
In an effort to mitigate risk, Debt Compliance Services has a suite of three web-based services: DCS Debt Manager℠, DCS Compliance Manager℠, DCS Calendar Manager℠ that creates a simple, cloud-based process for creating a checklist, implementing questionnaires, evaluating covenant issues, and scheduling payments and document deliverables.
- DCS Debt Manager℠ converts Debt agreements into easy-to-navigate webpages, linking defined terms and section references, and creates a checklist for monthly, quarterly, and annually reporting.
- DCS Compliance Manager℠ hosts web questionnaires based on the covenant checklist and are assigned to key finance and business stakeholders at HQ Finance, other HQ departments, and business units
- DCS Calendar Manager℠ allows all regular deliverables and payments to be scheduled to the actual business day each debt’s maturity is due.
Through more than 40-years of experience in the financial and treasury c-suites, the Debt Compliance Services founders have devised a system that reduces the probability of an unexpected default by 90%. Why? Because technical default is controllable with thorough knowledge of all covenant requirements and the implementation of a comprehensive process.
See below for a demonstration of how a typical in-house debt compliance system stacks up against the Debt Compliance Services turnkey solution.
- DCS Debt Manager℠ vs. In-House
- DCS Calendar Manager℠ vs. In-House
- DCS Compliance Manager℠ vs. In-House
|DCS Debt Manager℠||In-House Approaches|
|A single platform for the management of all agreements, which are converted to web pages with linked defined terms and section references||Researching multiple agreements is time-consuming and frustrating as one tries to be comprehensively accurate using soft copies to search and hard copies to understand the defined terms and section references of the searched text|
|All interpretive comments are noted on the website and therefore, knowledge is shared and retained for future reference||Interpretive comments are noted in the margins of each individual’s paper agreements and thus not shared|
|All agreements can be researched at the same time with our contextual search engine, allowing quick identification of the most relevant text by agreement||Researching paper documents and PDF copies is incomplete and prone to missing key items|
|Interpretations, findings and related files can be posted to the web pages and permanently shared with all users, which also allows new users to come up to speed much more quickly||As positions turn over, all knowledge of the replaced individual leaves with him|
|Agreements can be quickly conformed||Agreements with amendments are not usually conformed on a timely basis|
|DCS Calendar Manager℠||In-House Calendars|
|Repetitive payments, notices, certifications, and other deliverables are scheduled out to each business day to the maturity of each debt, using their repetitive rule||Usually Excel-based which are private to the person responsible for the quarterly compliance|
|These tasks are assigned to an owner and a manager, with due dates and estimated due dates||Usually the due dates are rules such “45 days after fiscal quarter-end” instead of July 16th, which can lead to missed dates due to manual errors|
|Email reminders are sent based upon estimated and actual due date rules||While the due dates can be incorporated in some sort of department calendar, the voluminous nature of the many debt deliverables usually precludes this|
|Overdue tasks are escalated with emails to senior managers||Managers have to ask the owners about completion status|
|Extensive reporting easily identifies the completion progress by owner, manager and task type|
|DCS Compliance Manager℠||In-House Quarterly Compliance Reviews|
|Questions are written based upon the comprehensive checklist and then allocated in web questionnaire modules for respondents designated as most knowledge about those covenants multipart covenants have a questionnaire drafted for each part||Without a comprehensive covenant checklist, it is impossible to ascertain all of the issues and covenant breaches|
|All reporting is assigned to subject matter experts and answered on a real-time basis, which quickly identifies any potential issues||Quarterly compliance reviews often the respondents must review the underlying covenant and these determine if they are in compliance|
|The CFO Exception report on the resolution of the various issues provides an audit trail, which supports the signing of the quarterly certificate||Some companies prepare a paper questionnaire, and circulate it among some people within the company and all responses must be manually compiled|
|The CFO Exception report on the resolution of the various issues provides an audit trail, which supports the signing of the quarterly certificate||Many companies review compliance with covenants among a handful of people by “flipping pages” and relying on their knowledge of the events over the past quarter|
|All responses and resolutions are saved on the website, allowing for quarter-to-quarter researching of issues||Some companies use an online survey tool such as Survey Monkey to distribute and collect the responses. The responses are analyzed manually and an exception report may or may not be generated. All responses must be downloaded and saved to the hard drive|
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A primary treasury objective is to maintain and maximize access to the capital and debt markets at the lowest cost – which means consents before the fact rather than waivers after the fact. And since “stuff happens,” treasury needs to pro-actively talk to the lenders about current problems, issues, or potential events that might affect access to those markets.