👉 Background: BWX is an Aussie manufacturer, distributor and marketer of skincare and haircare. It owns natural beauty brands like Sukin, and it bought a majority stake in Zoë Foster-Blake's Go-To Skincare for an impressive $89 million.

👉 What happened: Under the hood, things ain't so peachy. BWX expects to post an after-tax loss of between $10 and $14 million in FY22. And, it's understood to have had nearly $85 million in borrowings at the end of last year, payable to Commbank.

👉 What else: The company just offered its institutional investors new shares - at a 48% discount - to raise cash to pay some debt off. It looks like a pretty desperate move... But without it, BWX may have breached its debt covenants.

What's the key learning?

💡Debt covenants are restrictions that lenders will include in their loan agreements to stop borrowers from doing certain things. They're mainly seen as protections for the lender.

💡Some examples of a debt covenant could be:

• The borrow can't take out other debts with other lenders, or
• The borrower needs to have a certain debt to equity ratio.

💡 There can be serious consequences if you breach a covenant, 'cos it's like breaching a contract term. For example, the lender could request immediate repayment of the entire loan. Whatever covenants CBA and BWX had in place, BWX thought it was worth offering a 48% discount on its shares to avoid being in breach.

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