Food Lion, Inc., operates a chain of retail supermarkets principally in the southeastern United States. The supermarkets business is highly competitive, and it is characterized by low profit margins. Food Lion competes with national, regional, and local supermarket chains; discount food stores; single-unit stores; convenience stores; and warehouse clubs.

Food Lion recently entered into a credit agreement with a group of banks. Excerpts taken from the loan agreement follow.

Section 5.19. Limitation on Incurrence of Funded Debt

The Borrower will not create, assume or incur or in any manner be or become liable in respect of any [additional] Funded Debt [unless] the Ratio Income available for Fixed Changes for the immediately preceding four Fiscal Quarters to pro Forma Fixed Changes for such four Fiscal Quarters shall have been at least 2.00 to 1.00.

Section 5.20 Fixed Changes Coverage

At the end of each Fiscal Quarterthe ratio of Income Available for Fixed Changes for the immediately preceding four Fiscal Quarters then ended to Consolidated Fixed Changes for the immediately preceding four Fiscal Quarters then ended, shall not be less than1.75 to 1.0.

Section 5.21 Minimum Consolidated Tangible Net Worth

Consolidated Tangible Net Worth will at no time be less than (i) $706,575,475 plus (ii) 30.0% of the cumulative Consolidated Net Income of the Borrower during any period after [the new loan agreement is signed], calculated quarterly but excluding from such calculations of Consolidated Net Income for purposes of this clause (ii), any quarter in which the Consolidated Net Income of the Borrower and its Consolidated Subsidiaries is negative.

Source: Food Lion, Inc., loan agreement.

Required:

1. In two more weeks, the companys books will be closed for the quarter, and the fixed charges coverage might fall below the level required by the loan agreement. How can management avoid violating this covenant?
2. The companys tangible net worth may also fall below the amount specified in the loan agreement. How can management avoid violating this covenant?
3. Elsewhere in the loan agreement it says that the companys ratio of consolidated debt to total capitalization must be more than 0.75 to 1.0. How can management avoid violating this covenant?
4. Suppose you were one of Food Lions bankers, and you were thinking about making changes to the loan covenants. What management activities would you most want to limit? Why?