Lenders Enjoy Relaxed Bank Conditions, as Long as They Keep Up Debt Payments

Dozens of Israeli companies have recently received waivers from banks for meeting the financial ratios specified in their credit agreements due to the deterioration of their financial state.

Such waivers are generally offered for a fixed period and allow companies to continue functioning without the banks' demanding immediate repayment of their total debt.

Business loan agreements, known as covenants, include a variety of conditions and requirements covering the company's financial state. If the company fails to meet these conditions, the bank is entitled to demand immediate repayment of the credit. Banks, however, generally avoid such a move, particularly if the company is meeting its repayment schedule. The banks' consideration is simple: demanding immediate repayment of the credit could result in closure of the company. Therefore, banks prefer to waive the requirements in return for increased margins on the credit or a fine. When the company is in extreme financial straits, banks also tend to forgo the fine.

The most recent prominent example of this scenario is medical device maker Lumenis (Nasdaq: LUME). The company owed Bank Hapoalim $175 million and was meeting its scheduled interest payments. However, the company's debt to EBITDA (earnings before interest, depreciation and amortization) ratio rose above the limit of 3 set in the covenant to 3.7. This would have allowed Bank Hapoalim to demand immediate repayment of the loan, a move that would clearly have resulted in Lumenis' closure, burying with it the bank's ability to collect on the loan. Therefore, the covenant conditions were changed and Lumenis was given a few-month extension to meet the new target.

Financial ratio requirements give the bank an indication of the company's financial stability even if it is repaying loans according to schedule. A senior banking source said recently that even during good times, there are companies that request waivers on the loan conditions, but there has been a large upsurge in such requests recently.

Failure to meet terms of the covenant is not necessarily a cause for concern, with bankers more worried about a company's inability to meet payment schedules, according to the source.

"Financial ratios set in the loan agreement are designed to provide information that nothing unusual is being done in the company and no one is being fooled," said another banking source.