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

Note: CPE credit is not offered on this program

A live 90-minute CLE webinar with interactive Q&A


Thursday, July 18, 2019

1:00pm-2:30pm EDT, 10:00am-11:30am PDT

Early Registration Discount Deadline, Friday, June 21, 2019

or call 1-800-926-7926

This CLE webinar will examine the impact of tax reform on financial and other covenants in commercial loan documents. The Mayer Brown 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 impacts 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 Mayer Brown 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 to financial covenants should a borrower request 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

Chubb, Christopher
Christopher M. Chubb

Partner
Mayer Brown

Mr. Chubb is a Banking & Finance partner in Mayer Brown’s Chicago office. Chris focuses his practice on the...  |  Read More

Fisher, Frederick
Frederick C. Fisher

Partner
Mayer Brown

Mr. Fisher is a partner in Mayer Brown's Chicago office and is co-leader of the global Lending group. He focuses...  |  Read More

Wolk, Adam
Adam C. Wolk

Partner
Mayer Brown

Mr. Wolk is a partner in the New York office of Mayer Brown's Banking & Finance practice who focuses on...  |  Read More

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