This was first published in IFLR on July 21, 2025. 

Summertime blues: corporate finance faces a financial reporting reckoning

By Marianne Martin and Bennett Young

Borrowers and lenders can plan ahead of the curve amid financial pressures

Summer is just at the half-way point, but financial reporting for many borrowers for second quarter is still around the corner. Given market volatility, tariffs and other financial burdens – initial indicators suggest that companies are likely straining if not flailing under the weight of economic conditions. What this means for borrowers and lenders is that second quarter reporting could be underwhelming, if not disastrous – putting multiple borrowers in default under their loans.

Below is a look at some of the key market indicators likely to be strained when second quarter reports are available, and what borrowers and lenders alike can do to avoid or reduce the damage.

• EBITDA ills– The past few months have seen a topsy-turvy effect in the markets due to a number of factors. War, tariffs, inflation and now even immigration effects have put a tremendous strain on companies’ bottom lines, and we predict that earnings-based covenants, such as leverage tests hinged on EBITDA (or earnings before interest, taxes, depreciation and amortisation, a concept often defined differently per borrower) will be the first indicator that trouble is brewing. Even companies that have additional availability on their existing lines may find reduced EBITDA restricts their borrowing capacity and growth, and reductions in EBITDA can cause increases in interest margins in some credits.
• Asset tests dip – Inventory strains, given logistical issues caused by tariffs and other disruptions, may harken concerns – but these same economic pressures are being felt by borrowers’ account debtors as well. This is likely to have a diminishing effect on the valuation and validity of accounts and other assets used in asset-based financial covenants (such as borrowing base measurements and loan to value, current ratio or liquidity/net worth covenants). The same impact will be felt more broadly in specific industries as certain asset classes, real estate as an example, continue to meander in their recovery – putting borrowers in a deficit from which they simply cannot recover.
• Coverage tests shorten – Financial coverage tests (such as fixed-charge and interest coverage ratios), which reflect how far cash flow can cover costs, such as interest and other debt costs, are beginning to tighten for many companies. As overall business costs consume cash and thin out liquidity, a company’s ability to cover debt costs will be constrained. These cash flow strains are often viewed by lenders as a window to a company’s financial health – and a failure to maintain sufficient coverage can be seen as irreversible and fatal in the eyes of a lender, handicapping a borrower’s ability to get back to better health.

For lenders, there are steps that can be taken now to anticipate soft or poor upcoming financial results, and to be proactive with respect to any concerns. CONTINUE READING →