Covenant compliance and headroom
Leverage, interest cover, fixed charge cover, EBITDA cushion.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: covenant compliance and headroom.Updated 1 October 2026
Part of credit and restructuring models, with the models, labs and guides around it.
What it does
The maintenance tests in a credit agreement, computed each period against their levels. Total net leverage is tested against a maximum that steps down as the loan seasons; interest cover is EBITDA over cash interest; fixed charge cover is EBITDA less capex and cash taxes, over cash interest plus scheduled amortisation. Each is also expressed as an EBITDA cushion, the share of EBITDA that could be lost before the test breaks, so the tightest test is visible at a glance and comparable across all three.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 42–44: Maximum total net leverage (steps down), Minimum interest cover (EBITDA / cash interest), Minimum fixed charge cover
- Covenants, rows 6–8: Total net leverage, Maximum, EBITDA cushion: 1 - (net debt / maximum) / EBITDA
- Covenants, rows 11–12: EBITDA / cash interest, EBITDA cushion: 1 - minimum x interest / EBITDA
- Covenants, rows 15–17: Fixed charges: cash interest plus scheduled amortisation, Fixed charge cover: (EBITDA - capex - cash taxes) / fixed charges, EBITDA cushion: 1 - (minimum x fixed charges + capex + taxes) / EBITDA
- Covenants, rows 20–22: Tightest EBITDA cushion, Tightest test, Any test breached (1)
What a reviewer looks for
- Ratios shown with no headroom.
- Fixed charges that leave out scheduled amortisation.
- Net leverage netting cash the agreement does not let you net.
Learn it, then build it
Build · Lab · ~10 min
Covenant Headroom
Compute the three maintenance ratios from a certificate, find the binding test and its EBITDA cushion, and say whether a given downside breaches.
Build · Lab · ~15 min
Capital Stack Challenge
Finance a real buyout from revolver to equity, hold it through a shock, and explain every layer against the deal the sponsor actually did.
Read · Guide · 11 min
Credit and Covenant Modelling: What a Lender Actually Tests
Vocabulary: Covenant, EBITDA Cushion, Fixed Charge Coverage Ratio (FCCR), Interest Coverage Ratio.