It’s Time to Take a Hard Look at Your Debt Covenants

June 30th may be a day of reckoning for many early- and growth-stage companies with venture debt loan obligations. That’s a date when lenders schedule end-of-quarter “covenant testing” to ensure borrowers will continue to be able to make timely payments while using loans for their intended purposes. If you’ve taken on debt to extend your cash runway or other purposes, and if your business has suffered an unexpected setback from the coronavirus shutdown, you should view Stefan Spazek’s webcast on Covenant Management Amidst Pandemic Impacts today.

Watch the webcast: Click the above video webcast by Capital Advisors Group EVP Stefan Spazek.

In normal times, the covenant test is often no more than a cursory check-in. But the pandemic shutdown has been especially hard on companies that are pioneering new markets with new products, technologies, and services. Many took on debt to position for expected-but-still-unrealized revenues or to buy time before their next venture capital equity infusions but now are struggling to meet their obligations.

Stefan is our EVP and Director of Debt Placement, and he has been counseling companies on venture debt transactions for more than 10 years. In the webcast, he provides helpful guidance to anyone at risk of triggering one or more covenants due to the economic stress from the extraordinary events of the past several months. And he provides some welcome reassurance that many lenders—especially now—may be ready to work out solutions to problems arising with your covenants before they escalate.

“Ideally covenants are in place to prompt engagement or a conversation before more serious issues arise,” he says. “If it appears the company is on track to trip a covenant, communication is key.”

But you have to start the conversation early—which means now. The covenants in your loan most likely were established before the pandemic, which has created unprecedented challenges for borrowers and lenders alike. But it’s worth carefully reviewing the fine print. You may see opportunities for win-win revisions that reassure your lender while buying time to catch up as business starts returning to normal.

Capital Advisors Group has been advising venture-backed and growth-stage companies on debt financing transactions since 2003. We have advised on billions of dollars of transactions, and reviewed thousands of term sheets for hundreds of companies. Stefan’s experience working on hundreds of debt placement deals is invaluable, and we’re delighted he can share it with you on this webcast.

Best Regards,

Ben Campbell
CEO