Impact of Tax Reform on Commercial Finance Documents: Adjustments to Financial and Other Covenants

Recording of a 90-minute CLE webinar with Q&A


Conducted on Wednesday, June 6, 2018

Recorded event now available

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Program Materials

This CLE webinar will examine the impact of tax reform on financial and other covenants in commercial loan documents. The panel will discuss document revisions a borrower might request to address lower corporate tax rates and other tax law changes, and the lender’s perspective on those revisions.

Description

Tax reform has varying effects on commercial borrowers. The lower corporate tax rate will improve the after-tax return of many businesses, but they may see a reduction in deductible items like interest and depreciation.

The new pass-through business deduction will benefit certain partnerships but may impact the calculation of tax distributions for pass-through entities. Tax reform fundamentally alters the U.S. international tax regime for U.S. taxpayers. Commercial finance counsel must review and revise documents to address these changes.

The new tax law affects financial covenant metrics, including leverage ratios, fixed charged coverage ratios, and deferred tax assets and liabilities. The traditional leverage ratio may not capture the reduction in tax rates and immediate expensing of CAPEX.

Business interest deductions are capped at 30% of EBITDA from 2018 to 2021 and 30% of EBIT after that. The repatriation of cash currently held abroad will increase the domestic cash flow of many companies, but will not increase earnings or EBITDA.

Other covenants, including those relating to the cap on business interest deductions, pledging stock in foreign subsidiaries, and elimination of the carryback of net operating losses, may also need revision. The parties may desire specific “fixes” for these and other issues relating to tax reform. Carefully structured financial and other covenants will provide the lender with its intended protection and remedies and the borrower with continued flexibility to operate its business.

Listen as our authoritative panel discusses the impact of tax reform on commercial loan documents and how financial and other covenants might be revised to the satisfaction of borrowers and lenders.

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Outline

  1. Financial covenants and calculation of EBITDA after tax reform
    1. Leverage ratio
    2. Fixed charge coverage ratio
    3. Deferred tax assets
    4. Deferred tax liabilities
    5. Repatriation tax on earnings held abroad
  2. Cap on the business interest deduction
  3. Pledging stock of foreign subsidiaries
  4. Operating losses
  5. Restricted payments

Benefits

The panel will review these and other crucial issues:

  • How might the new tax rates affect the calculation of a borrower’s EBITDA and how might that change various financial covenants?
  • What kind of revisions should a borrower request to financial covenants to mitigate the effects of tax reform? How should a lender respond?
  • How should finance documents be revised to address new rules regarding repatriation of foreign earnings?

Faculty

Otero, Elena
Elena Otero

Partner
Holland & Knight

Ms. Otero primarily practices in the areas of real estate, finance and banking law, with a focus on all aspects of...  |  Read More

Mosby, Matthew
Matthew D. Mosby
Managing Director
KPMG

Mr. Mosby is a Managing Director in the Financial Institutions and Products group of KPMG’s Washington National...  |  Read More

Tevel, Sean
Sean J. Tevel

Atty
Holland & Knight

Mr. Tevel is a Miami private wealth services attorney who focuses his practice primarily on tax planning for...  |  Read More

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