THE ROLE OF COVENANTS IN ENSURING THE STABILITY OF FINANCIAL AGREEMENTS

Abstract

Covenants are an innovative tool for managing financial obligations, which enable the borrower to obtain favorable credit terms and maintain financial discipline. For the creditor, covenants are a means of protecting his interests and contribute to minimizing the risks associated with the borrower's insolvency. The article examines the meaning of the concept of "covenant", defines the scope of application and studies their role, place and purpose in financial agreements. The classification of covenants used in practice is analyzed, their types are highlighted. International approaches to the use of covenants are substantiated, their main types are highlighted: 1) the ratio of debt to equity; 2) ratio of debt to EBITDA; 3) minimum level of liquidity; 4) maintaining the level of interest coverage; 5) minimum level of equity capital. The study of Ukrainian practice showed that financial covenants are most often used, namely: liquidity ratio; indicator of the level of profitability; equity turnover ratio; coefficient of financial stability; coefficient of financial autonomy. The study showed that along with financial covenants, informational covenants are also used, which act as informational assistance for the creditor in monitoring the borrower's ability to fulfill his obligations. It has been proven that covenants have not only a positive, but also a negative side. The negative consequences for the borrower are: 1) restrictions on new borrowing; 2) restrictions on the payment of dividends; 3) restrictions on the sale of assets; 4) requirements for compliance with financial indicators within the limits of normative values; 5) restrictions on investments; 6) control over management decisions. It is substantiated that the decrease in the effectiveness of the use of covenants by the creditor is influenced by risks, namely: the complexity of monitoring and control of the borrower; increasing the risk of early debt repayment; conflict of interest with the borrower; legal and regulatory risks; loss of flexibility in negotiations with the borrower; the risk of excessive control. It has been proven that in order to reduce risks, lenders need to carefully balance the terms of the covenants and not create additional obstacles for effective cooperation with the borrower.