Calculating Senior Net Debt Ratios during Seasonal Raw Material Purchasing
Senior net debt ratios spike during seasonal purchasing as borrowings peak before processing margins register in trailing EBITDA.
Maintenance Test
Meaning
Periodic financial examinations measure a borrower’s compliance with agreed financial ratios at the end of each reporting quarter. This maintenance test evaluates the actual balance sheet figures against the thresholds established in the credit agreement. The process acts as an early warning system for lenders, highlighting cash flow issues before they lead to insolvency.
It does not apply to single-payment short-term trade facilities or credit lines that only apply covenants at the time of execution.
Operational Procedure
Treasury teams prepare for these examinations by gathering financial statements immediately after the close of the accounting period. Executing the maintenance test requires calculating adjusted earnings and net debt according to the specific rules of the credit agreement. This calculation includes adding back certain permitted expenses and adjusting for cash balances.
The resulting figures are presented in a compliance certificate signed by the chief financial officer. This official filing is submitted to the administrative agent of the lending group.
Calculated Outcome
The outcome of the calculation determines whether the borrower has stayed within the bounds of their credit risk limits. If the maintenance test confirms compliance, the borrower maintains access to their credit lines.
Remedial Action
Borrowers who fail to satisfy the covenant levels must immediately negotiate a solution to avoid a declaration of default. Passing the maintenance test is a prerequisite for normal treasury operations, so a failure requires a waiver or a restructuring of the credit facility. These negotiations often result in higher interest margins or tighter operational restrictions.