Practical Guidance for UAE Borrowers
Many UAE businesses continue to demonstrate strong performance and resilience, supported by a robust economic backdrop and active lending market. At the same time, a more dynamic global environment – characterised by higher interest rates and evolving market conditions – means that financial covenants are receiving closer attention.
For borrowers, this presents an opportunity to take a proactive approach. With careful planning and early engagement, covenant compliance can be effectively managed, helping to preserve liquidity, maintain lender confidence and support continued growth.
1. Focus on the Detail: Making Your Documentation Work for You
A detailed understanding of facility agreement terms is essential. In many cases, flexibility is already built into the documentation—but only if properly analysed.
Particular focus should be given to:
- How EBITDA is calculated and what adjustments are allowed (such as adding back one-off or exceptional costs, or including projected cost savings, which can increase EBITDA for covenant purposes);
- How “debt” is defined for covenant purposes (including whether items such as leases, shareholder loans and guarantees are included, which can affect your financial ratios);
- Covenant testing mechanics and timing;
- Availability of equity cure rights.
In more challenging conditions, careful analysis of the definitions can provide additional headroom and mitigate the risk of inadvertent breaches.
2. Interest Rates Continue to Drive Pressure
Given that UAE dirham rates track US monetary policy, borrowers are operating in an environment where borrowing costs remain elevated.
This is impacting:
- Interest cover ratios;
- Cash flow and liquidity;
- Refinancing dynamics for upcoming maturities.
Borrowers should test their forecasts against more challenging scenarios – not just expected performance – to understand how resilient they are if conditions worsen.
3. Move to Active Covenant Management
In more dynamic conditions, covenant compliance should be actively managed rather than periodically reviewed.
Best practice includes:
- Monthly (or more frequent) covenant monitoring;
- Rolling financial forecasts;
- Stress testing and sensitivity analysis.
Identifying potential issues early gives borrowers more options to address them effectively.
4. Engage Early with Lenders
The UAE market remains highly relationship-driven. Early and transparent engagement with lenders is consistently the most effective strategy.
Borrowers should:
- Raise potential issues well in advance of any breach;
- Share clear, data-backed financial information;
- Present a credible action plan.
Proactive and constructive engagement is more likely to result in supportive outcomes, while delayed engagement may materially constrain available options.
5. Consider the Full Range of Amendment Options
Where covenant pressure is anticipated, borrowers should explore available options early, including:
- Waivers for specific testing periods;
- Covenant resets to reflect revised performance expectations;
- Amend-and-extend transactions to address both covenants and maturities.
These solutions will often involve trade-offs, such as:
- Increased pricing or fees;
- Enhanced reporting obligations;
- Requests for additional security or guarantees.
Starting discussions early generally leads to more balanced outcomes.
6. Take a Holistic View of the Capital Structure
Covenant issues rarely sit in isolation.
Borrowers should assess:
- Cross-default provisions across financing arrangements;
- Implications under intercreditor agreements;
- Exposure from guarantees and off-balance sheet liabilities.
For UAE-based groups with operations or financing in multiple jurisdictions, it is important to consider the position across the entire group, not just individual facilities.
7. Security and Enforcement Considerations
Financing structures in the UAE often involve a mix of onshore and offshore security.
While enforcement frameworks have developed, they can still be:
- Complex and procedural;
- Time-intensive;
- Potentially value-destructive.
As a result, lenders typically prefer consensual solutions—but this should not be relied upon. Avoiding default scenarios remains key to preserving negotiating leverage.
8. Focus on Liquidity and Optionality
Liquidity is a central consideration in the current market.
Borrowers should prioritise:
- Maintaining headroom under committed facilities;
- Careful management of restricted payments and capital expenditure;
- Evaluating alternative funding sources, including private credit and shareholder support.
Stronger liquidity positions lead to more constructive lender discussions.
9. Plan for Downside Scenarios
Even where no immediate issues are anticipated, contingency planning is essential.
This may include:
- Refinancing strategies;
- Potential asset disposals or equity injections;
- Consideration of formal or informal restructuring options, including UAE preventive composition frameworks.
Planning ahead helps protect value and avoids the need for last-minute decisions.
Key Takeaways
- Act early – time materially improves outcomes;
- Understand your documents – flexibility is often available;
- Engage constructively – lender relationships are critical in the UAE;
- Plan ahead – proactive management supports resilience and growth.
How We Can Help
We advise corporates, sponsors and financial institutions across the UAE on:
- Covenant analysis and stress testing;
- Lender engagement, waivers and amendments; and
- Complex, multi-creditor restructurings and refinancings.
If you would like to discuss any of the issues raised in this Client Alert, please contact the Hadef Banking and Finance Team.