As more and more loans are closed without financial covenants in Europe, the bankruptcy of UK retailer Courts is a warning to lenders who abandon covenants too hastily.
The furniture seller was both forced into administration by its banks, RBS and Bank of Nova Scotia, this week and told that its profitable overseas businesses would not escape due to covenants included in a renegotiated credit facility closed in June.
As is reported in CF's December issue, which includes the inaugural loan markets survey, these covenants are in contrast to the majority of European corporates that are winning loans from their banks that exclude all financial covenants.
Courts had announced that its operations in Jamaica, Barbados, Mauritius, Singapore and Malaysia would avoid administration. But the terms of its credit facility state that the retailer exchanged security over its equity interests abroad in June in return for an extra £30 million in borrowing lines.
Without the more profitable foreign businesses, the banks would have recovered little from the debts Courts owes them. As it is, they will win control over majority stakes ranging from 50.1% to 87.7% in the foreign operations.