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).
6Waiver and amendment history
Facility closed in Q2 2026. No waivers, consents, amendments or PIK elections received since closing. The covenant spec at closing is still in force, so the results above are on the original definitions. Any new waiver or amendment is added here, dated and cited, and the spec is updated before the next test.
7Next 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.
1Early-warning view
| Borrower | Entries, last 4 quarters | Covenant | On amended terms | On closing terms | Signal |
|---|---|---|---|---|---|
| Quistlebeck Packaging | 4 (2 amendments, 1 waiver, 1 PIK election) | Senior Net Leverage | 4.21x vs 4.00x max | 4.58x vs 3.50x max | High |
| Thrumwick Logistics | 1 (consent only) | Fixed Charge Coverage | 1.62x vs 1.20x min | No change | Low |
| Marrowfen Components | 0 | Total Net Leverage | 2.60x vs 2.75x max | No change | Low |
“On closing terms” re-runs the test on the definitions and threshold in force at closing, so loosened terms can't hide a weakening credit.
2Log
| Borrower | Date | Document | Type | What changed | Source |
|---|---|---|---|---|---|
| Quistlebeck Packaging | Nov 2025 | Amendment No. 1 | Definition change | Cap on cost-savings and restructuring add-backs raised from 10% to 20% of EBITDA | [Q-A1] §1.01 (h), p. 4 |
| Quistlebeck Packaging | Feb 2026 | Waiver | Reporting waiver | FY2025 audited financials deadline extended by 45 days | [Q-W1] §2, p. 1 |
| Quistlebeck Packaging | May 2026 | Amendment No. 2 | Covenant reset + PIK toggle | Senior Net Leverage maximum raised from 3.50x to 4.00x for Q2 2026 to Q1 2027 (3.75x from Q2 2027); up to 2.00% of interest may be paid in kind | [Q-A2] §2.3, p. 3; §2.5, p. 4 |
| Quistlebeck Packaging | Aug 2026 | PIK election | PIK toggle used | 2.00% of Q3 2026 interest paid in kind | [Q-N1] p. 1 |
| Thrumwick Logistics | Mar 2026 | Consent | Consent only | Consent to a permitted acquisition; no covenant terms changed | [T-C1] p. 1 |
| Marrowfen Components | May 2026 | Closing | None since closing | No waivers, consents, amendments or PIK elections received | [A] |
The log is built only from the documents the lender gives us. A waiver or amendment we haven't received can't appear here.
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