How to use the loan covenant compliance calculator
- Enter EBITDA for the test period and the total debt on the test date.
- Add interest expense, debt service (interest plus principal due) and current assets and liabilities for the tests you want.
- Enter the limits from your loan agreement. Leave a limit blank to skip that test.
- Read how many tests pass and, for each, the actual ratio, the limit and how far EBITDA or current assets can move before the test fails.
Formula
Debt to EBITDA = total debt / EBITDA (must stay at or below the limit)
EBITDA to interest = EBITDA / interest expense (at or above the limit)
EBITDA to debt service = EBITDA / (interest + principal due)
Current ratio = current assets / current liabilities
Headroom for an EBITDA test is the percent EBITDA can fall before the ratio reaches its limit. For a breach it is the percent EBITDA must rise.
A borrower with $3,000,000 of EBITDA
Debt of $7,500,000 gives 2.50x against a limit of 3.50x, so there is room for EBITDA to fall 28.6%. Interest of $450,000 gives 6.67x against a minimum of 3.00x, with 55.0% of room. Debt service of $1,800,000 gives 1.67x against 1.25x, with 25.0% of room, and current assets of $2,400,000 over current liabilities of $1,500,000 give 1.60x against 1.20x, so current assets can fall 25.0%. All four pass.
Raise the debt to $12,000,000 and the leverage becomes 4.00x, which breaches the 3.50x limit. EBITDA would have to rise 14.3% to $3,428,571 to bring the ratio back to the limit.
Why headroom matters more than pass or fail
A test that passes by a hair can fail next quarter. The headroom column turns each ratio into the size of the cushion: how much EBITDA can fall, or current assets can fall, before you hit the limit. A borrower with 5% of headroom is one soft month from a conversation with the lender, and one with 40% is not.
Use the table to decide which covenant to watch. The tightest one is the one with the least headroom, and that is usually the one to plan around.
Definitions in your agreement
Loan agreements define EBITDA, debt, interest and the test dates in their own words, often with add-backs, caps on add-backs and rules for which period counts. They also describe what happens after a breach, such as a cure period or an equity cure. This tool uses the plain ratios, so enter the figures the way your agreement defines them. For coverage on a single loan, the DSCR Calculator goes deeper, and the Debt to Equity Ratio Calculator covers another common test.
To see how sales moves profit, and so EBITDA, try the Degree of Operating Leverage Calculator and the Operating Expense Ratio Calculator.
Assumptions and limits
- The four tests are ratios of the figures you enter. Other covenants, such as fixed charge cover, are not included.
- All figures are for the same test period, and EBITDA is the number your agreement uses.
- The limits are examples. Use the ones in your agreement.
- A test with a blank limit, or with a figure it needs missing, is skipped and not counted as a pass.
Frequently asked questions
What does 0 of 4 breached mean?
It means every test you entered passes. The headline counts breaches out of the tests that were run.
Why is a test missing from the table?
Its limit or the figure it needs was left blank. Fill in both to include it.
What does the percent in the last column mean?
For a pass it is how far EBITDA, or current assets for the current ratio, can fall before the test fails. For a breach it is how far it would have to rise.
Does this check my covenant for me?
It applies plain ratios to what you type. Your agreement may define the terms differently, so confirm the result with the agreement and your lender.