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Capital & valuation
Debt covenants
Conditions in a loan agreement — a minimum coverage ratio, a maximum leverage ratio, a minimum liquidity — that, if breached, let the lender demand repayment or reprice the loan.
Owned by: Manager / DirectorTest band: Manager / Director
In practice
Forecast the covenant ratios, not just cash. A breach in a slow quarter turns a manageable month into a negotiation with a lender holding all the cards.
The kind of thing the test asks
- A loan requires interest coverage of at least 3×. EBIT is $600k and interest is $180k. The business is…
- The forecast shows a leverage covenant breach in four months. The CFO should…
More in capital & valuation
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