As expected, Ineos have today confirmed that their proposed new covenants have now been accepted by their lenders.
For those unfamiliar with the mechanisms used in the world of high-yield debt, this does not involve any new money, or a refinancing. Instead, it means that the lenders have agreed to provide Ineos with more head-room in terms of its day to day operations. Thus the company have confirmed that there will be a “reset of the Leverage, Interest Cover and Debt Service Cover covenant levels, effective from September 2009”.
This sounds like financial small print. But it means Ineos and their lenders have agreed to make an adjustment to the conditions of existing loans, rather than to change the whole capital structure of the business. So Ineos employees, as well as their customers and suppliers, will no doubt be very reassured that everything has now been finalised.
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I guess covenants are there to warn lenders that their investment is starting to look less secure and to warn the company that it needs to start to protect investors. If lenders relax these terms isn’t there an increassed danger that debtor’s positions could deteriorate to a point where investor’s cash is more vulnerable. I wonder if both sides looked at refinancing and decided it wasn’t viable, so lenders took the higher risk instead of losing their investments. You need me as much as I need you (for now at least).