Bank Loan Covenant Measures and Mis-Measures
University of Bridgeport
August 24, 2009
North American Journal of Finance and Banking Research, Vol. 3, No. 3, 2009
Bank loan covenants are restrictions that require stated levels of performance by borrowers, and are often measured by standard financial ratios. The research on loan covenants has assumed that these measures are useful, providing information to lenders as to the viability of borrowers. This article uses a sample of current ratios to suggest that such balance sheet ratios may have limited predictive value of impeding defaults, and proposes that total receipts-to-cash flow, a ratio comprised of data from both significant financial statements, provides superior forecasts of such outcomes. The research is based on U.S. experience during the recent credit crisis.
Number of Pages in PDF File: 14
Keywords: Bank, loan, covenants, restrictions, performance, borrowers, financial ratios, lenders
JEL Classification: G21, M41Accepted Paper Series
Date posted: January 19, 2010
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