8.4 Monitoring of covenants

Where relevant and applicable to specific credit agreements, institutions should monitor and follow up on the requirements of collateral insurance, in accordance with the credit agreements or requirements of credit facilities.

Where applicable, institutions should monitor borrowers’ adherence to the covenants agreed in the credit agreements. The borrower’s adherence to covenants, as well as the timely delivery of covenant compliance certificates, where applicable, should be utilised as early warning tools. Early detection of deviations is key to protecting the institution’s position towards the borrower and other possible creditors involved. The ongoing monitoring of financial covenants should include all relevant ratios specified in the covenants (e.g. net debt/EBITDA, interest coverage ratio, debt service coverage ratio (DSCR).

Institutions should also monitor non-financial covenants not only by collecting the covenant certificate, where applicable, but also by other means, e.g. through close contact with the borrower by the client executive.