Trueline CovenantWhat a covenant test memo looks like.
A complete quarterly test memo for a fictional borrower, built on the covenant terms of a real public credit agreement. Download the PDF and the live-formula workbook below.
1Summary
| Test | Requirement | Borrower cert. | Our calculation | EBITDA cushion | Status |
|---|---|---|---|---|---|
| Total Net Leverage | ≤ 2.75x | 2.43x | 2.60x | 5.4% | Pass, watch difference flagged |
| Fixed Charge Coverage | ≥ 1.20x | 3.01x | 1.36x | 5.1% | Pass, watch difference flagged |
EBITDA cushion = how far EBITDA could fall before a breach, all else equal. This book's watch threshold is 10%.
Both covenants pass on our numbers, but both are much tighter than the certificate shows, for three reasons.
2EBITDA
| Line ($M) | Borrower | Ours | Source |
|---|---|---|---|
| Net Income | 1.40 | 1.40 | [C] p. 3; clause (a) |
| + Depreciation and amortization | 3.10 | 3.10 | [C] p. 5; clause (b)(i) |
| + Interest expense | 2.10 | 2.10 | [C] p. 3; clause (b)(ii) |
| + Income taxes | 0.55 | 0.55 | [C] p. 3; clause (b)(iii) |
| + Non-cash equity compensation | 1.95 | 1.95 | [D] line 2; clause (b)(viii), Annex E p. 2 |
| − Gain on sale of equipment | 0.00 | (0.30) | [C] p. 3; clause (c)(ii), Annex E p. 3 |
| EBITDA before capped add-backs | 9.10 | 8.80 | |
| + Capped add-backs claimed (closing costs, integration fees, severance) | 2.20 | 2.20 | [D] lines 4–6; clauses (b)(vi), (b)(vii), (b)(xiii) |
| Cap: 20.0% of EBITDA before these add-backs | none applied | 1.76 | (b)(xiii) proviso, Annex E pp. 2–3 |
| Capped add-backs allowed | 2.20 | 1.76 | 0.44 disallowed |
| EBITDA | 11.30 | 10.56 |
Finding 1: add-backs exceed the 20% cap. Three add-back clauses together “shall not exceed 20.0% of EBITDA in any measurement period (before giving effect to such addbacks)” ([A] Annex E pp. 2–3). The certificate takes $2.20M against a $1.76M cap.
Finding 2: an asset-sale gain was not deducted. Clause (c)(ii) requires deducting “any gain arising from the sale of capital assets” ([A] Annex E p. 3). The $0.30M gain is still in the certificate's net income.
3Total Net Leverage Ratio (maximum 2.75x)
| Line ($M) | Borrower | Ours | Source |
|---|---|---|---|
| Total Indebtedness (term loan, revolver, capital leases, earn-out) | 30.475 | 30.475 | [C] p. 2; “Indebtedness” clause (a), §1.1 p. 18 |
| − Unrestricted cash (netting capped at $7.5M) | (3.000) | (3.000) | [C] p. 2; Annex E p. 4 |
| Net debt | 27.475 | 27.475 | Agrees |
| ÷ EBITDA | 11.30 | 10.56 | Table above |
| Total Net Leverage Ratio | 2.43x | 2.60x | Annex E §1(b), p. 1 |
4Fixed Charge Coverage Ratio (minimum 1.20x)
For the first three test dates after closing, every component other than EBITDA is “Annualized” from the start of the facility. At Sept 30, 2026 that means six months of actuals × 2 ([A] Annex E p. 3).
| Line ($M) | Borrower | Ours | Source |
|---|---|---|---|
| EBITDA | 11.30 | 10.56 | |
| − Unfinanced capital expenditures | (3.90) | (5.20) = 2.60 × 2 | [C] p. 5; Annex E p. 4 |
| − Cash income taxes | (0.70) | (0.80) = 0.40 × 2 | [C] p. 5 |
| Numerator | 6.70 | 4.56 | |
| Cash interest expense | 1.60 | 2.10 = 1.05 × 2 | [C] p. 5 |
| + Scheduled principal | 0.625 | 1.25 = 0.625 × 2 | §2.4; [C] p. 5 |
| Fixed Charges | 2.225 | 3.35 | |
| Fixed Charge Coverage Ratio | 3.01x | 1.36x | Annex E §1(a), p. 1 |
Finding 3: fixed charges and capex are on the wrong basis. The certificate uses trailing-twelve-month actuals, which include months before the facility closed and so understate interest and principal on the new debt. On the basis the agreement requires, EBITDA could fall by about $0.54M (5.1%) before a breach.
5Suggested questions for the borrower (draft, for lender use)
- Please restate the Q3 certificate applying the 20.0% cap on clauses (b)(vi), (b)(vii) and (b)(xiii), and deducting the $0.30M equipment-sale gain under clause (c)(ii).
- Please recompute the Fixed Charge Coverage Ratio using Annualized amounts, as the definition requires for this test date.
- The integration fees under clause (b)(vii) need the Agent's approval and must arise within six months of a Permitted Acquisition. Please identify both.
- Please confirm how much capex was funded with revolver draws (treated as unfinanced).
6Next test
At Dec 31, 2026 the multiplier changes to 4/3; from Q1 2027 the ratio uses true four-quarter figures. Thresholds stay flat. Both covenants are inside the 10% watch threshold, so all inputs get a second independent check.
Scope: monitoring support that recalculates financial covenants from the documents listed. Not legal advice; it does not interpret the agreement on the lender's behalf.
The workbook keeps every step as a live formula, so you can change an input and watch the tests move. In a client memo, every page reference points to your own documents.
Want this on one of your own loans?
Send one borrower package and we'll run the same test, free, in 5 business days.
- Free on one borrower package
- Mutual NDA before any documents
- No obligation