Acceleration Clause
Categories: Board of Directors, Company Management, Company Valuation, Regulations
A clause in a nasty lender's contract that says, "If you ever don't have at least a 3:1 debt to EBITDA ratio, or you don't have at least 4% revenue growth, or you don't have a full supply of green M&Ms in the lobby (meaning five full bowls), then we have the right to accelerate demands for you to repay our loan. Take it or leave it." And yeah...why would companies take it? Because they had to. They were desperate and had no other choice. Kids, don't let this happen to you.
Related or Semi-related Video
Finance: What are Debt Service and Debt ...3 Views
Finance, a la shmoop. What is debt service and debt service ratios? Well debt
service is just the interest you pay on debt in a given year. Like you're [Definition written on a 100 dollar bill]
servicing the debt, like think about the oil demanded by a robot in a year she
demands to be serviced and the oil you serve her will you know quench her [Robot drinking oil]
thirst. Well debt service can be easy or it can
be hard, like whatever.com has 50 million bucks of 6 percent debt costing 3 [The debt service calculation is shown]
million a year to service. Well if whatever.com had 40 million bucks in [Vault full of money]
cash profits servicing its debt would then be easy and it would have a debt [Someone repeatedly pressing an easy button]
service ratio of 40 over 3 or 13 and 1/3 times coverage. Said another way the odds [The ratio calculation is shown]
that whatever.com would find itself in a position that it couldn't service
its debt are well very low. But think about the other side of the coin if [Somone about to flip a coin]
whatever.com had only 4 million dollars in cash profits well then it's debt
service ratio is 4 over 3 meaning that 75% of its cash flow leaves the company [Money going from whatever.com to the lenders]
and goes into the coffers of the kindly loving lenders who are nervous about the
company falling into default and going bankrupt which does not make the oil go
down easy... [Robot drinks oil and spits it out]
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