Maintenance Covenant

How a maintenance covenant works

• Tests. Common tests are a maximum total or senior net leverage (debt-to-EBITDA), a minimum interest coverage or fixed charge coverage, a minimum liquidity, and maximum capex. Recurring-revenue loans may test revenue or liquidity instead of EBITDA.
• Timing. Tested on a last-twelve-months basis at each quarter-end and reported in a compliance certificate with the financial statements.
• Levels. Often step down over the loan's life. They are usually set with a cushion to the sponsor's business plan.
• Definitions. The credit agreement's EBITDA and debt definitions, including add-backs, determine what is tested.

Maintenance vs incurrence

Springing covenants and covenant-lite

In a covenant-lite loan, the term loan has no maintenance covenant. Often the revolving facility has a springing covenant, tested only when revolver usage exceeds a set percentage of commitments. Only revolving lenders can usually enforce it, and the term lenders benefit only indirectly.

What happens after a breach

A breach is an event of default that gives lenders the right to accelerate and enforce, but covenant breaches often occur outside serious financial distress and usually lead to renegotiation rather than enforcement. The usual outcome is a waiver or amendment in exchange for:

• a fee and a higher margin, sometimes with payment-in-kind (PIK) interest;
• tighter terms or reduced baskets;
• reset covenant levels;
• additional sponsor equity, or a paydown from an equity cure.

The covenant's value lies in this early negotiation. It brings lenders to the table before a payment default, while enterprise value may still cover the debt.

How LPs use covenant data

LPs ask managers for:

• the share of loans with maintenance covenants;
• headroom at closing;
• the number of covenant breaches, waivers, resets and cures by vintage;
• how breaches were resolved.

A portfolio with frequent resets on easy terms has maintenance covenants in name only.

Worked examples

Examples are illustrative; figures are not market data.

Not the same as

• Incurrence Covenant: An incurrence covenant is tested only when the borrower acts. A maintenance covenant is tested every period.
• Loan Covenants: The covenant package is the full set of affirmative, negative and financial covenants. Maintenance covenants are one type of financial covenant.
• Covenant Headroom: Headroom measures the distance between the actual ratio and the covenant level.

Common mistakes

• Treating a covenant breach as a payment default. The borrower may be paying in full.
• Assuming a breach leads to enforcement. Most are resolved by waiver, amendment or cure.
• Comparing covenant levels across loans without comparing the EBITDA definitions behind them.
• Assuming a covenant-lite term loan is protected by the revolver's springing covenant.

Edge cases

• Covenant holidays (temporary suspension of tests) agreed in a downturn turn a maintenance-covenant loan into covenant-lite for a period.
• Pro forma acquisition adjustments can make a borrower compliant at the test date even as organic EBITDA falls.

Sources

1. Comptroller's Handbook: Leveraged Lending. Office of the Comptroller of the Currency (OCC), February 2008 (reputation-risk references struck through as of 2025-03-20 under OCC Bulletin 2025-4). Status: published booklet (not rescinded) (checked 2026-10-01). glossary pp. 59, 62, 64 — supports: Maintenance covenants require financial tests every reporting period, usually quarterly, and are breached by deteriorating earnings; incurrence covenants apply only when the borrower takes an action; covenant-lite loans carry bond-like incurrence covenants instead of maintenance covenants; covenant headroom measures how far performance can fall before a covenant is tripped
2. Concentration of Control Rights in Leveraged Loan Syndicates. Mitchell Berlin; Greg Nini; Edison G. Yu, Federal Reserve Bank of Philadelphia (Working Paper 19-41), WP 19-41, October 2019. Status: published working paper (checked 2026-10-01). Abstract; pp. 3-4 (incl. n. 5), 10-11 (incl. nn. 22-24), 22-23 — supports: A financial covenant breach is an event of default giving lenders the right to call the loan; maintenance covenants apply at periodic intervals regardless of events, typically quarterly, and are common in bank loans while other debt uses incurrence covenants; the most common tests are leverage, senior leverage, interest coverage, fixed charge coverage and minimum EBITDA; in covenant-lite deals the revolver keeps the financial covenants, sometimes springing on utilisation, and revolving lenders alone can waive or amend them; breaches usually lead to renegotiation, and in a 2006-2010 sample 87% were cured by amendment, typically with a higher rate and a fee

• Covenant-Lite
• Debt-to-EBITDA (Leverage Multiple)
• Interest Coverage Ratio (ICR)
• Loan Covenants