Alright, so this is giving me some trouble. How do you know when it’s positive or when its negative? I mean I get that negative is something they CAN’T do and positive is something they MUST do. But it gets tricky: 1) let’s say there’s a covenant that the payout ratio must remain below 30%. 2) And the the EBITDA interest cov ratio must be at least 3 times 3) And that the firm must make timely interest and principle payments. Which is positive? I think all three are. (Clearly, 3 is the right answer, but bear with me) Why can’t it be said that 1 is positive too? They MUST keep a payout ratio below 30%. Why isn’t that positive? Same goes for #2?
It’s 3, but I agree with you Smarshy, its a very thin line and can def depend on your perspective.
smarshy…i just did this question a few hours ago… and i was kinda confused too… in response to your question above. 1. Payout must remain below 30% - I thought of it being negative because it’s restricting you from INCREASING your payout further. So it’s not telling you how much you should get at…it’s telling you what you CANNOT get at. 2. EBIDTA ratio must be atleast 3 times - which means you can’t go below that - against restricting you from going below - not telling you to go to a certain level 3. Make time interest payments - well that’s kinda self explanatory - it’s telling you TO DO something - Not to NOT DO something…
It tells you not to pay late…
haha…true that… ok …well…no response to that
EXACTLY. It could be a negative. You CAN NOT make payments that are NOT timely.
This may not work but think of negative as “you can’t do this” and affirmative as “you must do this” or else.
^^ yup… that’s how I think about it too
Because it is really, you can NOT pay out more than 70% of your earnings. It’s a restriction, not an affirmative action.
Kind of like you can’t pay late, again.
There is no PLAY at all in the pricipal and interest. It is something you must do. The others can float around alot but can’t go below some floor amount. Swan…quit being the devils advocate.
mwvt9 Wrote: ------------------------------------------------------- > There is no PLAY at all in the pricipal and > interest. It is something you must do. > > The others can float around alot but can’t go > below some floor amount. > > Swan…quit being the devils advocate. So is that a positive covenant? He MUST stop being the devil’s advocate? Or negative, he CAN NOT be the devils advocate?
Smarshy, Smarshy, Smarshy. That is fun to say.
Dude, I can’t help but totally disagree with the whole concept of positive and negative covenants, in my mind, there should only be covenants and the very existance of those two class of covenants in my mind is retarded and something only lawyers could have thought of in one of their many office drum circles where they come up with their retarded loads of crap that they then turn into verbage which they use to justify their employment. Seriously though, law of relations says that for any positive restriction their exists a negative opposing position. By nature, any one of those covenants can be positive or negative and it has always annoyed me. Anyhow, just understand why each is separated in to each category, its fairly easy to spot and you’ll be fine.
negative…somebody needs to restrict him!! and if I don’t get that right…I’ll be very upset !
LOL, my bad, I’ll stop.
Niblita75 Wrote: ------------------------------------------------------- > This may not work but think of negative as “you > can’t do this” and affirmative as “you must do > this” or else. This is the best way to think of it. B/f I was trying to see whether you want the ratio to not go up or down to determine if its affirmitive or negative. Wrong wrong wrong.
for me the classical examples are positive - maintain the ratios to a level-doing that is Positive to debtholders negative- do not incur more debt- doing that is Negative to debtholders think of it as the effect of an action (ie not paying interest is an inaction - just made that word up)
I thought we established that maintaining ratios were a negative convenant. You CANNOT go above/below a certain threshold.
from financial dictionary & investopedia A bond covenant preventing certain activities, unless agreed to by the bondholders. Negative covenants are written directly into the agreement creating the bond issue, are legally binding on the issuer, and exist to protect the best interests of the bondholders. Also referred to as “restrictive covenant”. Investopedia Says… Think of a negative covenant as a promise not to do something. Usually, negative covenants limit the amount of dividends a firm can pay to shareholders and restrict the ability of the firm to issue additional debt. Generally, the more negative covenants exist in a bond issue, the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors negative covenant A clause in a loan agreement that prohibits the borrower from an activity. For example, a negative covenant may restrict the payment of dividends or the issuance of new deb positive covenant A clause in a loan agreement that requires a specified action by the borrower. For example, a positive covenant may mandate that the borrower maintain a specific level of working capital or issue periodic reports to credito