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    Credit / Covenants

    Covenant headroom

    How much EBITDA the business can lose before a covenant trips. Leverage, interest cover and DSCR against their limits, with the headroom in both ratio units and dollars — the number a CFO actually reports to the board.

    EBITDA$100.00MNet debt$350.00MVerdictWithin
    Net leverage
    3.50×
    covenant 4.00×
    Interest cover
    4.00×
    covenant 2.50×
    DSCR
    1.50×
    covenant 1.25×
    Tightest test
    Net leverage
    $50.00M of EBITDA headroom
    Covenant tests
    Headroom in ratio units and in EBITDA.
    Covenant tests
    TestActualCovenantHeadroomIn EBITDA
    Net leverage3.50×4.00×+0.50$50.00M
    Interest cover4.00×2.50×+1.50$37.50M
    Debt service cover1.50×1.25×+0.25$10.00M

    Net leverage is net debt over EBITDA; interest cover is EBITDA over interest; DSCR is CFADS over debt service.

    Inspect the model
    Choose a quick result view, a scaled comparison, or the complete diagnostic set.
    Leverage against net debt
    Where the line crosses the covenant is the debt capacity.
    Leverage against net debt0.0001.012.023.024.035.04$0.500M$0.500M$100M$100M$1.500M$1.500M$200M$200M$2.500M$2.500M$300M$300M$3.500M$3.500M$400M$400M$4.500M$4.500MLeverage (×)
    Canonical equations
    The exact relationships implemented by this engine.

    net debt / EBITDA · Tested as a maximum.

    EBITDA / interest · Tested as a minimum.

    CFADS / debt service · The project finance test.

    finance methodology

    A clear path from inputs to results.

    A covenant test is a ratio with a limit and a headroom. The number a CFO reports is not the ratio but how much EBITDA the business can lose before the test trips.

    Step-by-step methodWorked exampleAssumptions explained

    How to use

    1. Enter EBITDA, net debt, interest, CFADS and debt service.
    2. Set the three covenant limits.
    3. Read the headroom in both ratio units and dollars, and which test is tightest.

    The formula

    leverage=net debtEBITDA,cover=EBITDAinterest\text{leverage} = \frac{\text{net debt}}{EBITDA}, \qquad \text{cover} = \frac{EBITDA}{\text{interest}}

    Reference: Lender definitions: leverage as a maximum, cover and DSCR as minimums (Brigham & Ehrhardt, Financial Management, ratio analysis).

    Worked example

    $100M EBITDA, $350M net debt

    Inputs
    • Interest $25M, CFADS $60M, debt service $40M. Covenants 4.0×, 2.5×, 1.25×.
    Calculation path
    1. 1

      Leverage 3.5×, cover 4.0×, DSCR 1.5×. Headroom 0.5× = $50M of EBITDA.

    Result

    All three pass; leverage is tightest.

    Interpreting the result

    Headroom in EBITDA is the practical number: it says how much earnings can fall before the lender has a conversation with you.

    Assumptions & limitations

    • EBITDA as defined in the credit agreement, without add-backs.
    • Trailing twelve months.
    • No equity cure rights.
    • Net debt is total debt less unrestricted cash.

    Frequently asked questions

    Why is leverage usually the tightest?

    Because it is the test lenders price on, and it moves with both debt and earnings.

    Does DSCR apply outside project finance?

    It appears in real estate and infrastructure lending more than in corporate facilities.

    What is a typical leverage covenant?

    3.0–4.5× for a leveraged buyout, lower for investment grade.

    What happens on a breach?

    Usually a cure period, a waiver fee, or a default that accelerates the debt.

    Methodology last reviewed 2026-10-22. Results are informational and not financial or engineering advice — see our disclaimer.