Loan operations
What is compliance certificate?
Compliance certificate is a document signed by a borrower's officer that reports covenant calculations and certifies whether any default exists under the loan agreement.
A compliance certificate accompanies the periodic financial statements a borrower delivers under a loan agreement. An officer, often the chief financial officer, signs it to show the calculation of each financial covenant for the period and to certify that no default or event of default exists, or to describe any that do. The form is usually an exhibit to the credit agreement.
Lenders use the certificate as the starting point for covenant testing. Analysts compare the borrower's calculations with the financial statements and the covenant definitions, record the results and flag breaches or thin headroom. Certificates also often confirm other requirements, such as borrowing base figures, insurance coverage or capital expenditure limits.
Accepting the borrower's figures without recalculation is a common weakness, since borrowers may apply definitions favorably or make arithmetic errors. Late or missing certificates are themselves a covenant breach in most agreements and should be tracked. Discrepancies between the certificate and the financial statements should be investigated, resolved and documented in the credit file.
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