Capital
Covenant Headroom Calculator
One number matters here: how far EBITDA can fall before you trip. Everyone knows their leverage ratio today. Almost nobody knows the drop that breaches it — which is the number that decides whether a soft quarter is an inconvenience or a call with the lender.
Inputs
- LTM EBITDA
- Total debt
- Cash
- Maximum leverage covenant
- Cash interest
- Minimum fixed-charge coverage
How to use this calculator
- Enter LTM EBITDA as the lender defines it, not as your management accounts define it. Add-backs that survive the credit agreement's definition count; ones you invented do not.
- Enter total debt and cash, then the maximum leverage ratio and minimum fixed-charge coverage from the financial covenants clause.
- Read the headline: the percentage EBITDA can fall before the tighter of the two tests is breached. That is the number to carry into every forecast conversation.
- Check which test is tighter. Most people watch leverage and get caught by coverage. Coverage bites first when rates rise, because interest goes up without debt going up.
- Re-run this at the next test date, not today. Covenants are tested quarterly on the numbers as they will be then, and the cushion usually moves between now and then.
What each term means
- Covenant
- A promise in the loan agreement to keep a financial ratio inside a limit, tested each quarter. Breaching one gives the lender rights, whether or not you have missed a payment.
- Net leverage
- Total debt minus cash, divided by EBITDA. Whether cash may be netted, and how much of it, is defined in the agreement, not by convention.
- Headroom (turns)
- The gap between where your leverage ratio is and where the covenant caps it, measured in multiples of EBITDA. One turn = one times EBITDA.
- Fixed-charge coverage
- How many times earnings cover the fixed payments you cannot avoid. Definitions vary widely, so check what your agreement puts in the denominator.
- Equity cure
- A right, if your agreement has one, to fix a breach by injecting equity. Usually limited in number and in how often it can be used consecutively.
Educational disclaimer: Outputs are simplified educational estimates built from the numbers you enter — they are not financial, legal, tax, or investment advice, and real decisions deserve verified figures and qualified professionals.