An Outlook of the Covenants in Debt Contracts of Brazilian Publicly Listed Firms

September, 2021


Tatiana Albanez

This article examines the presence of covenants in the debt contracts of companies listed on the Brazilian B3 Exchange, to verify whether there is a relationship between the presence of covenants, the financial condition of firms and the quality of corporate governance, and also evaluates the distance to breach of the main covenants (covenant slack). The data on covenants were collected manually, directly from the explanatory notes to the financial statements of Brazilian nonfinancial companies listed on the B3 from 2007 to 2017. We identified 15 types of covenants in the explanatory notes related to loans, bonds, and financial leasing, with the standouts being the ratios Net Debt/EBITDA and EBITDA/Interest Expense, which together accounted for nearly 60% of the covenants observed. On average, the limits established of these ratios for the firms listed on the B3 were 3.4 and 1.8, respectively. Approximately 30% of the covenants were breached (i.e., the threshold was exceeded) in the period analyzed, with greater incidence of breach in 2015 and 2016. We found that on average, Brazilian companies had adequate covenant slack during the period studied, and that it is important to analyze renegotiation and waivers paper in the debt contracts.

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