Free tool
Would your facility still pass its tests?
Serviceability decides whether you get the money. Covenants decide whether you keep it. They are tested every quarter or every year for the life of the facility, a breach is an event of default, and most owners never read the list until they have already tripped one.
Covenant check
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
Every test passes, with room.
On these figures nothing is close to a line. Worth repeating the exercise on next year's numbers rather than assuming it holds: covenants are tested every period, not once.
Debt to equity: passed
1.48:1max 3.00:1
Interest-bearing debt divided by total equity.
Debt to EBITDA: passed
2.27xmax 3.00x
Total debt divided by EBITDA. Read as years of earnings to repay.
Interest cover: passed
6.67xmin 2.50x
EBITDA divided by interest expense.
Debt service cover: passed
2.09xmin 1.25x
EBITDA divided by interest plus principal.
Current ratio: passed
2.00:1min 1.50:1
Current assets divided by current liabilities.
Quick ratio: passed
1.31:1min 1.00:1
Current assets less stock, divided by current liabilities.
Tests not passing
0
An event of default under most agreements.
Passing narrowly
0
Within a tenth of the line.
Against manufacturing
Where similar businesses sit. Not a pass or a fail, and not the same data as the ATO benchmark tool.
- Net margin5% to 8%6.0%, inside the usual range
- EBITDA margin10% to 18%13.3%, inside the usual range
- Current ratio1.5 to 2.52.00:1, inside the usual range
- Debt to equity1 to 2.51.48:1, inside the usual range
- Debtor days45 to 60 days49 days, inside the usual range
- The definition in your facility agreement governs, and it will not always match this. Agreements routinely define EBITDA to exclude one-offs or non-cash items, or to add particular expenses back. Read the definition before you calculate the covenant, because the same business passes on one wording and breaches on another.
- Interest cover here is EBITDA divided by interest. It is also commonly defined as EBIT divided by interest, which produces a lower and less flattering figure. Both are in use, so check which one your agreement means.
Indicative only. Thresholds shown are levels commonly seen in facility agreements, not any lender's terms and not yours. Your agreement sets both the levels and the definitions, and the definitions are what decide the answer.
The standard package
Six promises about your numbers.
Levels commonly seen, not any lender's terms and not yours. What your agreement sets matters more than any of this, and so do its definitions.
| Covenant | What it tests | Commonly |
|---|---|---|
| Debt to equity | Interest-bearing debt over total equity | No more than 3:1 |
| Debt to EBITDA | Total debt over EBITDA | No more than 3x |
| Interest cover | EBITDA over interest expense | At least 2.5x |
| Debt service cover | EBITDA over interest plus principal | At least 1.25x |
| Current ratio | Current assets over current liabilities | At least 1.5:1 |
| Quick ratio | Current assets less stock, over current liabilities | At least 1:1 |
Debt to equity
- What it tests
- Interest-bearing debt over total equity
- Commonly
- No more than 3:1
Debt to EBITDA
- What it tests
- Total debt over EBITDA
- Commonly
- No more than 3x
Interest cover
- What it tests
- EBITDA over interest expense
- Commonly
- At least 2.5x
Debt service cover
- What it tests
- EBITDA over interest plus principal
- Commonly
- At least 1.25x
Current ratio
- What it tests
- Current assets over current liabilities
- Commonly
- At least 1.5:1
Quick ratio
- What it tests
- Current assets less stock, over current liabilities
- Commonly
- At least 1:1
The thing that decides the answer
The definition matters more than the level.
A covenant says EBITDA must cover interest two and a half times. Fine. But EBITDA in a facility agreement is whatever that document says it is. It may exclude one-off items, or include them. It may add back particular expenses. It may treat a discontinued operation one way and not another.
The same business, on the same figures, passes under one wording and breaches under another. So the first thing to do with a covenant is not to calculate it. It is to read how the agreement defines every term in it.
Interest cover carries the same trap in the open market: it is defined as EBITDA over interest in most agreements, and as EBIT over interest in a great deal of credit analysis. The gap between those two is your entire depreciation charge. This tool uses the first and says so, which is the least anyone should do.
A worked example
Below the line, and completely normal.
A hospitality business. Its current ratio sits under the level a standard covenant asks for, and squarely inside the range every comparable business runs at, because a venue holds almost no debtors and turns its stock over in days. Both of those things are true at once, and being able to say so is the difference between a difficult conversation and a short one.
A test does not pass on these figures.
Under most agreements that is an event of default, which is not the same thing as being insolvent and is usually not the end of the facility. Waivers and amendments are ordinary, generally for a fee, and they go considerably better raised early.
Debt to equity: passing narrowly
2.81:1max 3.00:1
Interest-bearing debt divided by total equity.
Debt to EBITDA: breached
3.06xmax 3.00x
Total debt divided by EBITDA. Read as years of earnings to repay.
Interest cover: passed
4.38xmin 2.50x
EBITDA divided by interest expense.
Debt service cover: passing narrowly
1.31xmin 1.25x
EBITDA divided by interest plus principal.
Current ratio: breached
1.20:1min 1.50:1
Current assets divided by current liabilities.
Quick ratio: breached
0.87:1min 1.00:1
Current assets less stock, divided by current liabilities.
Tests not passing
3
An event of default under most agreements.
Passing narrowly
2
Within a tenth of the line.
Against hospitality, cafes and restaurants
Where similar businesses sit. Not a pass or a fail, and not the same data as the ATO benchmark tool.
- Net margin0% to 5%4.0%, inside the usual range
- EBITDA margin8% to 15%13.1%, inside the usual range
- Current ratio0.8 to 1.51.20:1, inside the usual range
- Debt to equity1.5 to 32.81:1, inside the usual range
- Debtor days0 to 7 days3 days, inside the usual range
- The definition in your facility agreement governs, and it will not always match this. Agreements routinely define EBITDA to exclude one-offs or non-cash items, or to add particular expenses back. Read the definition before you calculate the covenant, because the same business passes on one wording and breaches on another.
- Interest cover here is EBITDA divided by interest. It is also commonly defined as EBIT divided by interest, which produces a lower and less flattering figure. Both are in use, so check which one your agreement means.
- A breach is an event of default under most agreements, which is not the same as being insolvent and is usually not the end of the facility. Waivers and amendments are common, generally for a fee, and they go far better when raised before the compliance certificate is due rather than after.
- A current ratio of 1.20 is below the covenant level commonly set, and it is entirely normal for hospitality, cafes and restaurants, where 0.8 to 1.5 is the usual range. Those two facts are both true, and it is worth being able to say so.
What this does not cover
- Your agreement's own definitions, which govern and which routinely differ from these
- Minimum EBITDA, net worth or tangible net worth floors, which are set deal by deal
- Testing frequency and the compliance certificate your agreement requires
- Non-financial covenants: reporting deadlines, changes of control, further security
- Whether a breach would actually be enforced, which depends on the lender and the relationship
Heading toward a breach?
The Debt Capacity Assessment models the covenants from your actual financials, with the stress tests and the downside cases, so the conversation with a lender starts from evidence rather than from a spreadsheet. $1,850, 5 business days.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nicholas handles it himself.
Common questions
A promise about your numbers that sits in the facility agreement. You agree to keep certain ratios above or below certain levels, and you certify each period that you have. They are separate from making the repayments: a business can pay everything on time and still breach, because a covenant tests the shape of the business rather than whether the money arrived.
Under most agreements a breach is an event of default, which sounds worse than it usually is. It is not the same as being insolvent, and it rarely means the facility is called in. What it does is hand the lender options, and it triggers a conversation. Waivers and amendments are ordinary and generally carry a fee. The single thing that changes how that conversation goes is whether you raised it or they found it.
Because they are levels commonly seen, not anyone's actual terms. Your agreement sets both the thresholds and, far more importantly, the definitions. EBITDA in a facility agreement is whatever the document says it is: it may exclude one-offs, exclude non-cash items, add particular expenses back, or treat discontinued operations differently. The same business passes on one wording and breaches on another, so read the definition before you calculate anything.
Both are in use, which is why the tool says which one it applies. EBITDA divided by interest is the version most facility agreements use and produces the higher, more flattering number. EBIT divided by interest is the more conservative version and appears just as often in credit analysis. If your agreement does not spell it out, ask, because the gap between them is the whole of your depreciation.
You may both be right. Covenant levels are generic and industry ranges are not. Hospitality routinely runs a current ratio between 0.8 and 1.5, which sits below the 1.5 a standard covenant asks for, because a cafe holds almost no debtors and turns its stock over in days. That is why the industry ranges sit beside the covenant result here rather than replacing it: one is a promise you made, the other is context for whether the promise was well set in the first place.
No. It is arithmetic on figures you entered, against levels commonly seen in the market. It is not credit advice, not a credit assessment, and not a review of your agreement. Andorra Advisory Group does not arrange credit and is not a credit representative.
General information only. Not credit advice, not a credit assessment, and not a review of your facility agreement. Covenant levels shown are commonly seen in the market, not any lender's terms. Industry ranges are drawn from a secondary compilation of ABS, commercial and lender data across ten broad sectors, and are not the same source as the ATO benchmark tool on this site.