Every day brings more news of the legal consequences of backdating practices.
While legal and reputational risks lie outside treasury’s control, backdating may have a direct effect on liquidity—treasury’s bread and butter.
Many debt instruments contain covenants that permit the lender to put the bonds of the company at par, if the company does not file its 10Q or 10K on time.
“This gives bondholders (and some of them have less-than-straightforward agendas, e.g., hedge funds) a lot of power,” noted an investment banker at one of the top banks. Lenders can trigger a liquidity crisis and/or companies may end up with much less attractive terms.
Treasury does not need to wait for the other shoe to drop. According to this senior banker, his firm has participated in several proactive renegotiations to avoid the liquidity hit. “Everything is possible for a price,” he noted. The renegotiation removes the chance that the borrower will go into a technical default. Certainly, he advised, going forward, companies should be aware that covenants of this nature may be triggered in sometimes unforeseen situations.