Non-ratio Covenants

Abstract

Banks normally wish to ensure that dividends are not paid which take excessive cash out of the company or reduce its net worth by more than it can afford. There is, of course, no reason why a profitable company with a sound balance sheet should not pay dividends and it is often in the bank’s interest that it should. Without a reliable stream of dividends the stock market is unlikely to look favourably on an equity issue; and yet a well-timed equity issue may improve the credit of the company and thus indirectly help to ensure repayment of the bank’s loan. Thus the bank will normally ask not whether a dividend should be paid but what is a sound level or what are the circumstances in which a dividend might start to become imprudent.