Goodwill as a Banker's Weapon
Corrections & Amplifications</br></br>SOLECTRON Corp.'s 50% debt-to-capital covenant pertains to two credit lines, which the company says it hasn't drawn down. Yesterday's Heard on the Street column didn't specify which of Solectron's sources of funds contained the covenant.</br></br>(WSJ Sept. 24, 2002)</br></br>WHEN COMPANIES take big charges to earnings to write down "goodwill" they often urge investors to ignore the charges as mere accounting entries that don't affect their operating performance or financial stability. But bankers may not be so easily spun.</br></br>Potential write-downs of goodwill assets by several big companies are looming -- and may place them in jeopardy of violating covenants on their borrowing agreements. By itself, this doesn't mean that any of these companies will be pushed into default on their debt. But it could give banks leverage to win concessions from the borrowers, such as higher interest rates and fees, the pledging of assets as security or agreements by the companies to pay off their loans sooner.