1. Loan Covenants and the Impact on Credit Decisions Presented By: Karen Drennan, Drennan and Associates Molly Drennan, Northern Trust Bank June 7, 2012 Drennan and Associates

4. Loan Covenants What is a Loan Covenant Why Do Banks Add Covenants to Loan Agreements Typical Covenants Typical Financial Ratios How this impacts the Customer, Supplier, and the Bank. Drennan and Associates

5. Loan Covenant Defined A covenant is a condition(s) that the borrower must comply with to be within the terms of the loan agreement. In most cases if the borrower is not within compliance the loan will be considered in default and the lender has the right to demand payment. Generally there is some period of time that allows the borrower to cure the situation. Drennan and Associates

6. Why Banks Add Covenants to Loans Maintain Loan Quality Keep Adequate Cash Flow Preserve Equity Improvement of known Capital Structure Weakness To Keep and updated picture of the Financial Performance and Condition Drennan and Associates

7. Typical Loan Covenants Hazard Insurance Key-Man Life Insurance Payment of Taxes and Fees Financial statements submitted according to the agreement. Asset loans are generally monthly. Less risky loans are generally quarterly. The information is submitted with the borrowing base certificate. Borrower agrees to pay all expenses that could result in the assets being encumbered by a lien from the government (per these would take priority over they banks lien) Drennan and Associates

8. Other Common Restrictions-need approval Distributions or Dividends Change in Management Mergers and Acquisitions Cross Corporate guarantees Additional loans Capital Spending Expansion, opening new locations Drennan and Associates

9. Typical Financial Ratios on the Borrowing Base Certificate Interest Coverage Ratio Maximum Total Debt to EBITDA Ratio Minimum Quick Ratio, Current Ratio (liquidity) Minimum Return on Assets, Return on Equity (profitability) Minimum Equity, Minimum Working Capital, Maximum Debt to Net Worth (leverage) Drennan and Associates

10. Case Studies 2 Large Marine Accounts 1 Mid Size Armor Account Drennan and Associates

11. Questions ?????????????????????????? Drennan and Associates