Dissertation: Debt Covenant Guidance in Financial Agreements

According to Välimäki’s study, a well formulated debt covenant finance agreement can be used to mitigate a bank’s finance risks, reduce problems created by asymmetric information and principalagent relationship, remove uncertainty, help to solve pricing difficulties created by dynamic circumstances and deepen co-operation between a bank and a company.

Although there have been many changes in financial markets, small and medium size companies still rely mainly on banks when it comes to funding. But the lack of satisfactory collateral is often a problem.

– These problems can be mitigated with the use of debt covenants, terms of individually tailored loan agreements. Partnerships between companies have become a prerequisite for success, explains Välimäki.

Today, companies are more likely to be intertwined than stand-alone entities as creating and maintaining networks have become the key factors of prosperity. Debt covenant finance and partnership share the same fundamental elements of which trust, interaction, predictability and proactivity are most essential.

Traditionally, banks rely on debt covenants as means to control credit risk when their collateral position is unsatisfactory. Through the use of debt covenants, the bank pursues to maintain the debtor´s ability to pay its obligations and often to preserve the debtor´s identity as it was when the loan was provided. In case of changes to the company’s solvency or identity, timely and precise information is needed for the bank to be able to re-evaluate its risk position.

– The uses of debt covenants have expanded to include factors not linked to creditworthiness, for example ensuring the stability of the bank’s profit and managing the customer relationship in dynamic circumstances. For these reasons, individually tailored loan agreements have started to resemble business agreements with partnership features, says Välimäki.

Debt covenant guidance offers unlimited variations. But, for the agreement to be efficient from legal, risk management and economical perspectives, different, more versatile kind of knowledge is required. At best individually tailored finance agreement containing relevant and coherent debt covenants is able to contribute to solving SME companies’ financing challenges and assists in creating companionship between contracting parties.

In addition, the study evaluates the relationship of debt covenant finance and partnership as well as clarifies the relevance of a risk management oriented loan agreement as a tool for and means to manage the co-operation between a bank (creditor) and a company (debtor). Special attention is paid to information as a topic.

Public examination of a doctoral dissertation

Public examination of a doctoral dissertation of Olli Välimäki ”Rahoitussopimuksen kovenanttiohjaus. Vakuuden arvioinnista kohti sopimusoikeudellisia riskinhallintamekanismeja. Tarkasteltavana erityisesti informaatio ja kumppanuus” (Debt Covenant Guidance in Financial Agreements) is on Thursday, 5 of June at 14 o´clock in Auditorium Kurtén.

Orders: Lakimiesliiton Kustannus, www.kauppakamarikauppa.fi