Covenants
Covenant cures and waivers
status: draft
Covenant cures and waivers
Covenant breaches happen. Markets turn, vintages underperform, business strategies shift, or you simply miscalculate headroom. What matters is how you handle it. Cure rights, equity cures, waivers, and amendments are the tools for managing covenant problems before they become events of default.
From the capital provider’s perspective, how you handle a covenant issue reveals as much about you as the breach itself. Proactive communication and clear remediation plans strengthen relationships. Surprises and delayed disclosure destroy them.
status: draft
Cure periods
Most covenants include a cure period—time to fix the problem before it becomes an event of default.
Standard cure periods by covenant type
| Covenant Type | Typical Cure Period | What Starts the Clock |
|---|---|---|
| Financial (TNW, liquidity, leverage) | 30 days | Delivery of non-compliant financials |
| Portfolio (concentrations, WA tests) | 10-15 business days | Delivery of non-compliant borrowing base |
| Reporting (late delivery) | 5-10 business days | Original due date |
| Payment (facility interest/fees) | 3-5 business days | Original due date |
| Notification | 3-5 business days | When event occurred |
| Servicing (delinquency thresholds) | 30-60 days | Delivery of non-compliant servicer report |
What constitutes a valid cure
A cure must bring you back into full compliance, not just close to the threshold.
Valid cure:
- TNW covenant requires $12M minimum
- You deliver financials showing $11.5M TNW
- You contribute $1M equity within cure period
- New TNW is $12.5M—above the $12M threshold
Invalid cure:
- Same situation, but you contribute only $500K
- New TNW is $12M—exactly at threshold
- Many facilities require cure to threshold plus a buffer (typically 5-10%)
Check your documentation for:
| Element | Why It Matters |
|---|---|
| Cure to threshold or above | Some require buffer above the level |
| Measurement timing | When is compliance tested—on cure date or next testing date? |
| Cure period in business days vs. calendar days | Significant difference over weekends/holidays |
| Notice requirements | Must you notify lender before attempting cure? |
| Cure right limitations | Does failure to cure eliminate future cure rights? |
Cure actions by covenant type
| Covenant Type | How to Cure | Timeline Pressure |
|---|---|---|
| TNW shortfall | Equity contribution, retained earnings, asset revaluation | Moderate—30 days |
| Liquidity shortfall | Cash infusion, draw on committed facilities, asset sale | High—often 10-15 days |
| Leverage excess | Debt paydown, equity raise, reclassification | Moderate—30 days |
| Concentration breach | Asset sale, exclusion, new originations | High—10-15 days |
| WA test failure | Pool reconstitution, exclusions | High—10-15 days |
| Delinquency breach | Charge-offs, sales, collections | Moderate—30-60 days |
| Reporting delay | Submit the report | Critical—5-10 days |
status: draft
Equity cures
Equity cures allow you to fix financial covenant breaches by injecting capital. They’re a valuable safety valve but come with significant limitations.
How equity cures work
- Identify the breach: Your quarterly financials show TNW of $11M vs. covenant minimum of $12M
- Calculate the shortfall: $1M plus required buffer (if any)
- Source the cure capital: Typically requires cash equity, not debt
- Execute contribution: Wire funds to originator within cure period
- Retest covenant: Calculate compliance including new equity
- Deliver compliance certificate: Certify covenant is now satisfied
Equity cure mechanics
| Element | Market Standard | Variations |
|---|---|---|
| Timing | Within cure period (typically 30 days) | Some allow extension to 45-60 days for equity raise |
| Form | Cash equity contribution | Subordinated debt sometimes qualifies if deeply subordinate |
| Amount | To threshold plus 5-10% buffer | Some require cure to pre-breach level |
| Source | From existing shareholders or new investors | Some restrict to existing shareholders only |
| Calculation | Added to TNW and liquidity | Some only add to specific covenant being cured |
| Verification | Officer certificate with updated calculation | Some require auditor confirmation |
Limitations on equity cures
Capital providers limit equity cure availability to prevent permanent operation on the edge of default.
| Limitation | Typical Market | Purpose |
|---|---|---|
| Lifetime cap | 2-3 cures over facility life | Prevents perpetual cure reliance |
| Consecutive quarter restriction | No more than 2 consecutive quarters | Forces underlying improvement |
| Minimum period between cures | 2-4 quarters | Prevents back-to-back crisis management |
| Covenant floor | Cures only available above certain TNW | Prevents deeply distressed operation |
| EBITDA add-back limits | Cure equity doesn’t add to EBITDA | For leverage covenants based on EBITDA |
When equity cures aren’t available
| Situation | Why No Equity Cure |
|---|---|
| Non-financial covenants | Change of control, fundamental changes can’t be “cured” |
| Some portfolio covenants | Pool composition issues may require substitution not cash |
| Payment defaults | Missed payments are cured by payment, not equity |
| Representation breaches | Can’t cure a false representation |
| Cure rights exhausted | Lifetime cap already used |
| Below floor | TNW below covenant floor where cures are available |
status: draft
Waivers
A waiver is lender agreement to overlook a specific covenant breach. Unlike cures, waivers don’t fix the underlying problem—they excuse it.
When to seek a waiver
| Situation | Waiver vs. Cure |
|---|---|
| Temporary breach that will self-correct | Waiver appropriate |
| Breach requiring remediation time | Waiver with plan |
| Breach that cure can’t fix (non-financial) | Waiver required |
| Systematic issue needing covenant reset | Amendment, not waiver |
| Breach where cure period is insufficient | Waiver to extend cure period |
Waiver process
- Identify breach: Determine what covenant is breached and by how much
- Develop remediation plan: How and when will you return to compliance?
- Prepare request: Written waiver request with remediation timeline
- Negotiate terms: Waiver fee, conditions, monitoring requirements
- Execute documents: Waiver letter or limited amendment
- Implement plan: Execute remediation within agreed timeline
- Report progress: Enhanced reporting during waiver period
Waiver costs
| Cost Element | Typical Range | Notes |
|---|---|---|
| Waiver fee | $25K-$75K | One-time fee to lender |
| Legal costs (lender) | $15K-$40K | You typically pay their counsel |
| Legal costs (yours) | $10K-$30K | Your counsel for negotiation |
| Monitoring fee | $5K-$15K/month | During waiver period |
| Rate step-up | +100-200 bps | Sometimes required during waiver |
| Total first waiver | $50K-$160K | Plus ongoing costs if step-up |
Waiver conditions
Waivers rarely come without strings. Expect:
| Condition | Purpose |
|---|---|
| Remediation plan | Documented path back to compliance |
| Remediation timeline | Specific dates for interim milestones |
| Enhanced reporting | Weekly or daily reports during waiver |
| Covenant tightening | Stricter levels once waiver expires |
| Additional collateral | More security during uncertainty |
| Restricted payments | No dividends during waiver period |
| Management reporting | Regular calls with lender |
| Commitment reduction | Lower facility size |
status: draft
Amendments
Amendments permanently change covenant levels or terms. Use them when the original covenant no longer fits your business—not as a band-aid for a single breach.
When amendment is better than waiver
| Situation | Waiver | Amendment |
|---|---|---|
| One-time breach, returning to compliance | Yes | No |
| Business model changed, covenant permanently tight | No | Yes |
| Market conditions shifted covenant benchmarks | No | Yes |
| Temporary stress with clear recovery | Yes | No |
| Covenant set wrong at inception | No | Yes |
| Multiple waivers on same covenant | No | Yes |
Amendment process
- Build the case: Why is the covenant inappropriate, not just breached?
- Propose new levels: What levels would be appropriate and why?
- Prepare projections: Show compliance under new levels over facility life
- Request IC approval: Amendment typically requires lender credit committee
- Negotiate terms: Amendment fee, any offsetting changes
- Document: Full amendment agreement to credit agreement
- Execute: Signature pages, delivery of closing items
Amendment costs
| Cost Element | Typical Range | Notes |
|---|---|---|
| Amendment fee | $50K-$150K | One-time fee to lender |
| Legal costs (lender) | $30K-$75K | Full agreement revision |
| Legal costs (yours) | $20K-$50K | Your counsel |
| IC review fee | $10K-$25K | Some lenders charge for committee time |
| Rate adjustment | 0-50 bps | May require pricing increase |
| Total amendment | $110K-$300K | Plus any ongoing pricing change |
What gets amended together
Amendments are expensive. If you’re opening the documents, address multiple issues:
| Primary Request | Consider Adding |
|---|---|
| TNW covenant reset | Liquidity covenant adjustment |
| Concentration limit increase | Related eligibility criteria expansion |
| Modification limit increase | Delinquency threshold increase |
| Advance rate increase | Corresponding trigger level adjustments |
| Facility size increase | Covenant levels proportional adjustment |
status: draft
Communication strategy
How you communicate covenant issues significantly affects outcomes.
Timing of disclosure
| Timing | Impact |
|---|---|
| Before breach occurs | Best—shows monitoring and proactivity |
| At breach discovery | Good—demonstrates transparency |
| With compliance certificate | Required—but late for relationship |
| After lender discovers independently | Bad—destroys trust |
| Never (hope they don’t notice) | Catastrophic—misrepresentation |
What to communicate
| Element | What to Cover |
|---|---|
| Current status | Exactly what covenant, how much breach |
| Cause | Why did this happen? |
| Trajectory | Getting better or worse? |
| Remediation plan | Specific steps and timeline |
| Request | What you’re asking for (cure extension, waiver, amendment) |
| Supporting data | Projections showing recovery |
Building the relationship account
Covenant discussions go better when you’ve built relationship capital:
| Before Issues Arise | Why It Matters |
|---|---|
| Regular communication | Lender knows your business |
| Deliver reports early | Track record of reliability |
| Flag good news proactively | Balanced communication |
| Invite for portfolio review | Transparency signals |
| Address minor issues quickly | Shows operational competence |
status: draft
What happens when cure fails
If you can’t cure and can’t get a waiver, the breach becomes an Event of Default.
Escalation sequence
| Stage | What Happens | Your Options |
|---|---|---|
| Cure period expires | Technical EOD exists | Still negotiate waiver |
| Lender reserves rights | Formal reservation letter | Continue waiver discussions |
| Standstill agreement | Temporary freeze on remedies | Buy time for solution |
| Cash trapping | Excess cash to principal | Reduces future borrowing capacity |
| Borrowing suspension | No new advances | Operational constraint |
| Acceleration notice | Full balance due | Refinance or sell |
| Enforcement | Lender exercises remedies | Liquidation risk |
Negotiating from default
Even in default, negotiation continues. Capital providers prefer resolution to liquidation.
| Leverage You Have | Leverage They Have |
|---|---|
| Operational knowledge of portfolio | Right to accelerate |
| Servicer role (if you’re servicer) | Right to replace servicer |
| Ability to refinance and pay off | Cash trapping |
| Time value (lengthy enforcement) | Reputational impact on you |
| Portfolio value depends on your platform | Market knowledge of your distress |
status: draft
Documentation and tracking
Build systems before you need them.
Covenant tracking system
| Element | Purpose |
|---|---|
| Covenant calendar | All testing dates and reporting deadlines |
| Current positions | Real-time calculation of each covenant |
| Headroom dashboard | Distance from each threshold |
| Trend analysis | Direction of movement over time |
| Early warning alerts | Notification at 80% of threshold |
| Cure tracking | Remaining cures, time since last cure |
Cure documentation
When you execute a cure, document everything:
| Document | Purpose |
|---|---|
| Cure notice | Formal notification to lender of cure action |
| Evidence of contribution | Wire confirmation, board resolutions |
| Updated calculation | Covenant compliance calculation including cure |
| Officer certificate | Certification of compliance post-cure |
| Lender acknowledgment | Confirmation cure was accepted |
status: draft
Common pitfalls
Waiting until you breach. The best time to address a covenant issue is before breach. If you see headroom declining, start conversations early. Lenders are more flexible with proactive borrowers than reactive ones.
Certifying compliance when you’re not. Signing a compliance certificate when you know a covenant is breached is a misrepresentation and typically a separate Event of Default. It eliminates your credibility and may eliminate your cure rights. If you’re breached, disclose it in the certificate.
Underestimating cure costs. A “simple” waiver can easily cost $75K-$100K in fees and legal. An amendment to reset covenant levels: $150K-$250K. Budget for these costs and factor them into your decision about how aggressively to set covenants at inception.
Using equity cures casually. Each equity cure used reduces your remaining capacity. If you’re burning through cures, you have an underlying business problem—not a covenant calibration problem. Address the root cause.
Negotiating amendments during distress. Amendments negotiated from a position of weakness come with worse terms. If you know your business model is shifting in ways that affect covenants, request amendments proactively when you’re still in compliance.
Not tracking waiver conditions. Waivers often come with conditions—remediation milestones, enhanced reporting, restricted activities. Failing to meet waiver conditions can trigger new defaults. Track conditions as carefully as you track covenants.
Assuming one lender speaks for the group. In syndicated facilities, waivers and amendments may require majority or unanimous lender consent. One supportive lender doesn’t guarantee approval. Understand the consent threshold and build support across the lender group.
status: draft
Related topics
- Covenants overview — the five covenant categories and their interactions
- Financial covenants — TNW, liquidity, and leverage tests and equity cure mechanics
- Portfolio covenants — cure mechanics for collateral tests
- Triggers, tests, and performance events — how covenant breaches cascade to facility triggers