What is debt capital compliance?

Debt capital compliance is the process of making sure that a borrower follows all the rules laid out in a capital provider credit agreement. The three main aspects of debt capital compliance are covenant management, portfolio monitoring, and capital provider reporting.

After companies raise debt, they're often surprised by the volume of financial and asset-level reports they have to provide to their capital provider in order to maintain full access to their capital. Part of this is a matter of process—it tends to be lawyers that negotiate these documents—and part of this is a matter of experience. Companies that haven't raised or managed debt before often struggle to make the most of their debt raise, especially if they lack in-house capital markets expertise.

Here, we'll walk through some of the key aspects of debt capital compliance, as well as operations and technology best practices for raising and managing debt capital effectively.

What are the three main components of debt capital compliance?

The three key components of debt capital compliance are covenant management, portfolio monitoring, and company financial reporting.

The three key types of debt capital compliance
The three key types of debt capital compliance

Covenant Management. As we previously covered, covenants are the rules of your credit agreement. Examples of standard debt capital covenants are that your company has adequate liquidity (i.e., cash in the bank) for the life of the credit facility and does not take on additional debt.

Portfolio Monitoring. Equity investors swing for the fences with their investments. They can afford to take a laissez-faire approach to managing their companies, given that the expectation is that only several of their portfolio companies will generate significant returns. Debt investors, on the other hand, only generate their desired return if all, or nearly all of their investments perform as expected. That's why debt investors check in with borrowers at a regular cadence (e.g., weekly or monthly) to make sure that the assets that back the debt raise haven't significantly changed in value. For example, every time a borrower submits a draw request to their capital provider, they must also submit a borrowing base certificate that provides an up-to-date snapshot of their collateral.

Company Financial Reporting. In addition to providing regular reports on their portfolio, debt capital borrowers must also provide reports on the broader financial state of their businesses. For example, capital providers typically request deliverables like annual financial statements or audits. These outputs may not relate directly to the borrower's collateral, but do provide context on the safety of the debt capital investment.

How can technology ensure debt capital compliance?

The right technology can help your company ensure debt capital compliance by keeping you up to date on upcoming deadlines, automatically generating the financial and portfolio reports that your capital provider expects to see, and alerting you when you're in danger of tripping a covenant or other credit agreement stipulation.

Without these protections in place, it can be easy to miss a deliverable deadline, include inaccurate or stale data in a capital provider report, or breach a covenant inadvertently. Any one of those missteps can reduce or block your company's access to funding and cause a major operational slowdown.

Want to learn more?

After businesses raise debt capital successfully, their challenge shifts from accessing debt capital to making sure they’re making the most of their credit facility. When it comes to debt capital compliance, the only way to guarantee timely and accurate reporting is to rely on technology designed to ingest financial and portfolio data and export accurate, up-to-date capital provider deliverables. If you're interested in learning more about software that can help you scale your capital markets function, just request a demo of Finley here.

All information presented herein is for informational purposes only, and Finley Technologies, Inc. does not assume any liability for reliance on the information provided. Before making any decisions that may affect your business, you should consult a qualified professional advisor.

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