Mr Lewis joined Southern Cross as Chief Financial Officer after it issued a profit downgrade in May. The owner of the 2DayFM radio network said that it expected full-year net profit to fall 10 percent below the previous year's underlying PAT of $89 million. Although the company's gearing remains within its banking covenant of less than 3.5 times earnings before interest, taxes, depreciation and amortisation, there is concern in the market that the company is slipping into a danger zone with its debt covenants?

Some market analysts believe that if revenues continue to deteriorate, gearing of above three times EBITDA could trigger a breach of banking covenants. ("Southern Cross CFO quit over writedown ", Darren Davidson, The Australian, 28 July 2014)?

Required:

1) After reading the above extract, use the debt hypothesis to explain the actions analysts would expect of Southern Cross.

Answer rating: 100% (QA)

The debt hypothesis suggests that companies facing financial distress may take actions to manage the... View the full answer