Covenant Breach: Working With Your Bank
A loan covenant breach doesn’t have to become a default. What the bank actually wants, what the reporting has to look like, and how to keep the relationship intact.
A Covenant Breach Is a Warning Shot. What Happens Next Depends on What You Send the Bank in the First 30 Days.
Most covenant breaches are not defaults. They are the bank's early-warning system telling both sides the deal has drifted from its original underwriting. What determines the outcome — forbearance, waiver, restructured facility, or accelerated demand — is the quality of the financial information the borrower produces, the credibility of the plan attached to it, and whether the bank believes management has the situation in hand.
The workout group at the bank is not the same team that made the loan. They inherit the file, they read the reporting, and they decide whether the relationship stays with the bank or gets moved out. Their decision framework is straightforward: Does the borrower know what happened, do they have a credible plan, and can they report against it weekly.
If the answer to all three is yes, you buy time. If the answer to any one is no, the cost of capital doubles or the facility goes away. We build the reporting, the plan, and the cadence that keep the bank comfortable while the business does the work to recover.
Common Covenants
The Ones That Trip First.
In middle-market credit agreements, four covenants account for most breaches. Each one requires a specific response.
Fixed-Charge Coverage Ratio (FCCR)
EBITDA less capex, taxes, and distributions, divided by debt service. A minimum FCCR of 1.10–1.25x is standard. FCCR trips when EBITDA compresses, when capex spikes, or when a distribution the bank didn't anticipate goes through. Rebuilding to compliance usually requires both a cost action and a distribution pause — both of which the bank will want to see modeled.
Debt Service Coverage Ratio (DSCR)
EBITDA over principal plus interest. Common in asset-based lending and real-estate-secured credit. DSCR breaches often precede FCCR breaches by a quarter or two. If DSCR is trending down, the forecast has to show whether next quarter's number is above or below the covenant — and what leadership is doing about it.
Leverage (Debt-to-EBITDA)
Total funded debt divided by TTM EBITDA, usually with a step-down schedule. Trips when EBITDA falls faster than the amortization pays down the debt. The response usually involves both an EBITDA plan and a debt reduction path — and the bank wants both in the reporting package.
Minimum EBITDA or Liquidity
A hard floor: minimum TTM EBITDA of $X, or minimum unrestricted cash of $Y. Simplest to measure and hardest to negotiate around when it trips. The reporting has to show the trajectory back to compliance and the milestones the business has to hit to get there.
What the Workout Group Actually Wants.
An honest diagnosis. Not a rationalization. What happened in the business, when it happened, why the covenant tripped, and what management believes the underlying cause is. The workout group has seen thousands of these. They can spot a whitewash from the first page.
A 13-week cash forecast. Weekly rollforward, prioritized disbursements, reconciled to the bank statement. Non-negotiable. If it doesn't exist, that gets built first. See our turnaround 13-week forecast piece.
A recovery plan with milestones. Cost actions, revenue actions, capex deferral, distribution pause. What, when, by whom, and what the financial impact should be by quarter. The bank measures the borrower against these milestones every reporting cycle.
A path back to compliance. Modeled month-by-month showing when each covenant returns to compliance under base, downside, and stress scenarios. If compliance requires a covenant amendment, the ask is quantified in the package.
A reporting cadence that matches the risk. Weekly cash package, monthly financials with variance analysis, quarterly compliance certificate. When the situation stabilizes, the cadence relaxes. When it doesn't, the cadence tightens.
Forbearance, Waiver, or Restructured Facility.
Forbearance agreement. The bank agrees not to exercise remedies for a defined period while the borrower works the plan. Comes with a fee, tighter reporting, and sometimes additional collateral or personal guarantees. Buys time; doesn't fix the underlying issue.
Covenant waiver. The bank waives the specific breach, usually with amended covenant levels going forward. A waiver signals the bank believes the situation was temporary and the borrower is on a credible path. It's the outcome to work toward.
Restructured facility. New credit agreement with reset covenants, revised amortization, sometimes new pricing. Appropriate when the underlying business has changed enough that the original deal no longer fits.
Exit or refinance. The bank asks the borrower to leave — find another lender, sell the business, or accept a workout that ends in payoff. Usually the outcome of poor reporting or poor execution against a plan the bank already accepted.
Before the Next Reporting Date
The Package You Send Determines the Conversation You Have.
If you're heading into a covenant breach or already in one, we build the reporting package, the cash forecast, and the recovery plan — and we sit at the table for the workout meetings. Call directly or send us a note.
Tell Us the Situation
The Bank, the Covenant, and the Timing.
Which lender you're with, which covenant is tripped or trending, what the reporting date is, and whether counsel is involved. That's enough to know how we can help and how fast.
Schedule a Discovery Call
We’ll reach out within one business day.