Lenders and Covenants

Covenant certificates, borrowing bases, EBITDA definitions and headroom.

Reference Notes

EBITDA, adjusted EBITDA and trailing twelve months

EBITDA is earnings before interest, taxes, depreciation and amortization, a rough proxy for operating cash generation that lenders and buyers use to size debt and price a company. Adjusted EBITDA adds back items argued to be non-recurring or non-operating, and every adjustment needs support because the other side will challenge it. A credit agreement defines the version it wants, and the covenant is calculated on that definition, not on the company's own; trailing twelve months is the usual window.

Source: Practice; credit agreements define their ownLast revised September 2026General information, not advice

Lender covenants: fixed charge coverage, leverage, interest coverage, DSCR, minimum liquidity

Financial covenants are the promises in a loan agreement measured from the financial statements: a fixed charge coverage ratio, a leverage ratio of debt to EBITDA, interest coverage, a debt service coverage ratio or a minimum liquidity balance, each defined in the agreement's own terms. A compliance certificate computes them from the closed books and an officer of the company signs it, so the books have to be closed and the computation checked before the due date. Headroom is watched every month, because a breach discovered at quarter-end is a negotiation held from weakness.

Source: Practice; the credit agreement governsLast revised September 2026General information, not advice

Borrowing base certificates and asset-based lending

An asset-based line of credit advances against eligible receivables and sometimes inventory, and the borrowing base certificate reports what is eligible: receivables within an aging cut-off, net of concentration limits, disputed balances and related-party amounts, at the agreed advance rates. It is prepared on the lender's schedule, often monthly or more, from an aging that ties to the ledger. An ineligible receivable counted as eligible is the finding a field examiner is looking for.

Source: Practice; the credit agreement governsLast revised September 2026General information, not advice

Debt accounting: current versus long-term, covenant breaches and waivers, issuance costs, modifications, troubled debt restructurings

The portion of debt due within twelve months is current, and a covenant breach at the balance sheet date that makes the loan callable, or will unless cured within a grace period, makes the whole balance current unless, before the statements are issued or available to be issued, the lender waives, or has lost, its right to demand repayment for more than one year from the balance sheet date or, where there is a grace period, it is probable the breach will be cured within it (ASC 470-10-45-11); a short waiver is not enough. Even a waiver that meets that test leaves the debt current when it is probable the company will fail the covenant again at a measurement date within the next twelve months (ASC 470-10-45-1). Debt issuance costs are presented as a deduction from the debt and amortized to interest expense, except that the costs of a line of credit may be carried as an asset (ASC 835-30-S45-1). A renegotiated loan is first tested as a troubled debt restructuring when the borrower is in financial difficulty and the lender grants a concession (ASC 470-60), and otherwise as a modification or an extinguishment depending on how much the cash flows change (ASC 470-50).

Source: FASB ASC 470-10-45-1 and 45-11; ASC 470-50; ASC 470-60; ASC 835-30Last revised September 2026General information, not advice

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