Maintenance covenants
LBOCovenants tested at regular intervals regardless of whether the borrower does anything, typically a leverage or coverage ratio.
A maintenance covenant requires the borrower to stay within a financial ratio, tested quarterly whether or not anything has happened. Net leverage below some multiple of EBITDA is the standard example.
They bite in downturns rather than during expansion, because the ratio deteriorates when EBITDA falls even if the company never borrows another euro. That is what makes them the lender's early warning system.
The useful way to read one is as headroom expressed in earnings, not as a ratio. A company at 4.5x against a 5.5x covenant can absorb an 18% fall in EBITDA before breaching, and that number tells you far more than the two multiples do.
A breach is a default but rarely the end. Lenders typically grant a waiver for a fee and a higher margin, because enforcing means owning a business they never wanted, and sponsor deals often carry an equity cure right allowing an injection to fix the test.
Worked example
Net debt 450 against 100 of EBITDA is 4.5x, tested against a 5.5x covenant.
Expressed as headroom, the covenant binds when EBITDA falls to 450 divided by 5.5, which is 81.8. That is an 18% decline the company can absorb.
If EBITDA lands at 80, leverage is 5.6x and the test fails with no new borrowing at all. An equity cure of 1.8, counted as EBITDA, restores compliance.