Businesses suffering plunging revenues because of Covid-19 are seeking to avoid potential debt breaches by substituting last year’s profits in place of this year’s in the documents they present to their lenders.
The UK pub chain Punch Taverns, US events group Live Nation Entertainment and Samsonite, the Hong Kong-listed luggage maker, are among companies employing the tactic, according to filings and people familiar with the moves. The strategy amounts to asking lenders to imagine that the pandemic had not happened, but debt holders have so far accepted it because acknowledging depressed 2020 earnings could cause problems on both sides.
“Conceptually I’m not fine with it; it doesn’t make any sense,” said one Punch bondholder. “But I don’t have any incentive to fight against the company and to push [it] down a messy path.” When companies breach terms known as covenants — such as a requirement to stick within certain ratios of debt to earnings — lenders are normally at liberty to demand immediate repayment, or in extreme cases trigger restructurings and take control of business assets….
The entire economy is going full Enron, booking revenue they never made to borrow more money they can’t repay: Ebitdac – earnings before interest, tax, depreciation, amortisation and coronavirus.https://t.co/vp4ljVv5qi
— Leo Weese 獅草地 (@LeoAW) June 18, 2020