The financial market crisis has now reached the real economy for some time. Companies' profits are falling, sales figures are collapsing and EBITDA is decreasing. However, the deterioration of a company's economic situation is of particular relevance not only to management and company owners, but also, of course, to the company's creditors and, in particular, lenders, who fear for the repayment of the loans they have granted.

Meaning of financial covenants

For the shareholders of a limited liability company and the shareholders of a stock corporation, the law provides for a crisis warning instrument. In order not to be able to react belatedly to a company crisis that is already becoming apparent, the management board of an AG and the management of a GmbH must immediately convene a general meeting or shareholders' meeting as soon as a loss of half of the share capital or nominal capital is to be assumed. This is intended to give the shareholders the opportunity to restructure the company in good time. For corporate creditors, the laws do not generally provide for a corresponding early warning system. For them, the crisis is therefore usually very difficult to recognize in advance, so that they often only learn of the critical economic situation of the company when insolvency can hardly be averted. As a rule, this legal situation is hardly acceptable for a lender who has to fear for the default of all loans granted by him. For this reason, lenders require their borrowers to individually provide so-called financial covenants as an instrument for preventive early crisis detection in order to be able to identify an impending corporate crisis as early as possible. Financial covenants relate to the financial situation of the borrower, who is required to maintain certain ratios relating to equity, debt, earnings and/or liquidity. These ratios are intended to provide the lender with information about the borrower's ability to repay the loan and make periodic debt service payments.