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To: Jane4IceCream who wrote (263526)	10/13/2003 9:08:47 AM
From: Pogeu Mahone	Respond to of 436258

<<"It's very difficult to understand a company's liquidity position from reading the financial statements," said Pamela W. Stumpp, a managing director at Moody's Investors Service.>> October 12, 2003 MARKET WATCH Why the Secrecy About Financial Covenants? By GRETCHEN MORGENSON ANY companies have increased their financial disclosure recently, responding to shareholders' cries for greater details about their operations. But most corporations still refuse to lay open a set of financial statistics that are central to their ability to survive. These are financial covenants, or restrictions a company has set with lenders in exchange for loans. Financial covenants vary, but they can involve a company agreeing to maintain its net worth at a certain level or keep its cash flow high enough compared with its interest payments. Covenants protect lenders by allowing them to call loans if a company fails to meet its requirements. Violating covenants can set in motion events that lead to bankruptcy. Enron's devastating spiral into Chapter 11, for example, was related to violations of financial covenants. Still, the details of most covenants are kept between a company and its bank. "How many investors are out there who have no idea about these debt covenants and how important they are?" asked Peter S. Cohan, a management consultant in Marlborough, Mass., and author of "Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy" (Jossey-Bass, 2003). "Anyone investing in a heavily indebted company is likely to be surprised by covenant violations because there is no systematic way of reporting them." Carol Levenson, director of research at Gimme Credit, an independent research firm, said, "Many companies don't disclose these covenants or where they stand with regard to them, which can be tricky to calculate, until it's too late and they're in danger of violating them." One solution, Mr. Cohan said, would be requiring companies to include in their quarterly reports the specifics of their covenants, their standing on each measure and the risks of noncompliance. Filings could also be required if a material change took place in a company's operations that put it in violation of a covenant. Ms. Levenson said she would like to see disclosure of any amendments to existing agreements or waivers that a company has requested from its bank. To be sure, many banks grant waivers to companies that are in violation of their covenants, so noncompliance does not always spell doom. "It's very difficult to understand a company's liquidity position from reading the financial statements," said Pamela W. Stumpp, a managing director at Moody's Investors Service. "Although steps have been made to make it more transparent, it doesn't go far enough." Some companies are already increasing disclosure. EDS, the computer-services company, described its covenants in its most recent quarterly statement, spelling out what its minimum net worth must be, how the figure is calculated and what would occur if the covenant were violated. Sean Healy, a spokesman, said the disclosure was a strategy of new management "to give investors a better understanding of our business and to build confidence." Other companies should follow. Corporate defaults are down but remain high. Moody's said 66 companies defaulted on $30.3 billion in bonds in the first nine months of 2003 compared with 118 defaults totaling $135 billion during the same period last year. If a company does default, increased disclosure on covenants would keep investors from ugly surprises. Copyright 2003 The New York Times Company \| Home \| Privacy Policy \| Search \| Corrections \| Help \| Back to Top