Covenant breach: what happens next.
In short
A covenant breach is an event of default, but for a solvent business that acts early it is usually settled by negotiation. The ratio is fixed at the quarter-end test date, weeks before the compliance certificate reports it, so model it as soon as the management numbers are in and go to the lender first with a diagnosis, a cash forecast and a plan. The remedies run from a waiver or reset, through an equity cure where the documents allow one, to an amend-and-extend or new money.
Written by Gregory Elgunov, Managing Director · Last reviewed 25 September 2026
Put the numbers to work: The refinancing read reads a named company's refinancing position from its public charge register.
This guide deepens the short answer in our guide to raising debt. If a test date is close, read the last section first.
Leverage usually trips first, and cover follows it down.
Most lower-mid-market facilities carry two to four maintenance covenants tested quarterly on a trailing twelve-month basis: a leverage covenant (net debt to EBITDA), an interest-cover or debt-service-cover covenant, sometimes a cashflow-cover covenant, and often a capex limit. When trading softens, the test with the least headroom trips first. On most facilities that is leverage: against a debt balance that barely moves, a modest fall in trailing EBITDA moves the ratio sharply, and the same lost profit pushes every cover ratio down at once. On amortising bank debt with a debt-service test set a little above 1.0 times, cover can go first, because the repayments sit inside the test.
Watch leverage on a rolling twelve-month basis rather than against the last audited year, and a breach shows one or two quarters out. Every good option in this guide depends on that lead time, because a breach first learned of from the compliance certificate is already on the record. The headroom calculator in our guide to loan covenants shows how far EBITDA can fall before a leverage covenant breaks, and the equity cure that would put it right. Fund debt with a springing covenant may leave no test to breach at all while the revolver is undrawn or lightly drawn, though the lender watches the monthly numbers regardless and the conversation tends to start later.
Related reading: what covenants are market, and what to push back on · the covenant that bites first.
The test is fixed on the test date, before anyone reports it.
A financial covenant is tested as at a quarter-end, and the compliance certificate that reports the ratios follows within a delivery window, typically thirty to sixty days. The ratio is fixed on the test date, so once the quarter’s management numbers are in hand, well before the certificate is due, you know whether you have tripped. The weeks in between are your window to decide how to report, and whether to speak to the lender before the certificate does it for you. The figure runs the sequence from the test date to the fix.
From the test date to the fix.
Step 1, Quarter end
The test date
Each covenant is tested as at this date, on trailing twelve-month figures, so the result is set here, before any certificate reports it.
Step 2, Before the certificate is due
Management numbers in hand
You know whether you passed and by how much. This is the window to work out a remedy and speak to the lender first.
Step 3, Typically 30 to 60 days later
Compliance certificate
A director certifies each covenant: the level required, the actual figure and the calculation behind it.
Step 4, With the certificate, or sooner if you tell the lender
Event of default
The breach is an event of default. While it stands, new drawings on the revolver usually stop, and the lender can demand repayment and, in the last resort, enforce its security; some bank facilities add default interest. On a first breach reported with a plan, it rarely goes that far.
Step 5, If the fix needs time
Standstill
The lender undertakes not to act on the default for a set period, usually against fuller reporting and a timetable, while a waiver, reset, cure or refinancing is agreed. The default stands until then.
The remedies, and what each costs, are in No. 05.
Typical windows on a UK leveraged facility.
Most UK mid-market leveraged facilities now provide an equity cure, and a typical cure provision lets the borrower serve a cure notice within roughly ten business days of the compliance certificate and inject the funds within a further ten or so. The cure can then complete up to around three months after the test date. The clock runs from the test date and the certificate, so a problem noticed late leaves less of it.
The cure windows above follow the equity-cure provisions described by Osborne Clarke and the Association of Corporate Treasurers’ borrower’s guide to the LMA leveraged facilities agreement. Your own documents govern; read the definitions before you rely on any of it.
A breach gives the lender rights it rarely uses in full.
Against a business still trading and paying interest, a lender that accelerates and enforces almost always recovers less than one that works the situation out. The security a cashflow lender holds, a debenture over the company and a charge over its shares, bites only if the relationship breaks down entirely.
What usually happens is that the account moves to the bank’s business-support or restructuring team, which handles stressed but viable credits. The move is unsettling but does not, in itself, mean the facility will be pulled. As advisers Gateley and Kreston Reeves both put it, whether a breach is waived or escalated turns overwhelmingly on the relationship and on whether the lender has been kept informed. The team will want a diagnosis, a short-term cash forecast and a credible plan, and given those early, the unit is a route back to the mainstream book. The lender’s first step is usually a reservation-of-rights letter, which confirms the default and records that continuing to lend waives nothing. Where the fix will take time to settle, it may also agree a standstill: a set period in which it will not act on the default while a waiver, reset, cure or refinancing is agreed.
The lender’s own set-up shapes the outcome. Research on UK management-buyout lending in the 1990s found that lenders with a dedicated specialist unit were materially more likely to waive a breach and less likely to recall the loan than those without one (Accounting and Business Research).
Every remedy has a price, and a plan lowers it.
The remedies run roughly in rising order of cost and disruption, from a one-off waiver to new money from a junior or special-situations lender, with the equity cure standing apart as the one the borrower controls. The table after the ladder sets out what the lender usually asks for in return and when each fits.
The remedies, in rising order of cost and disruption.
First resortLast resort
One-off waiver
The lender waives this breach, so the default falls away.
Reset or amendment
Covenants loosened for the coming tests, returning to the original levels as trading recovers.
Amend-and-extend
The maturity pushed out and the covenants reset in one negotiation.
New money
Junior or special-situations lending, the most expensive debt in the market.
The equity cure, the remedy the borrower controls.
Where the documents allow one, shareholders inject new equity to cure one test at a time, within a cap over the life of the loan.
What each remedy costs, and when it fits.
| Remedy | What the lender usually asks for | When it fits |
|---|---|---|
| Waiver | A waiver fee, and often tighter terms from then on | A first breach, flagged early with a plan |
| Reset or amendment | An amendment fee, and possibly a margin uplift, tighter undertakings, more information or, on fund debt, payment-in-kind interest that rolls onto the balance | A covenant that has run ahead of trading the plan expects to recover |
| Amend-and-extend | An amendment fee, and possibly a margin uplift | A maturity that was near anyway |
| New money | The price of the most expensive debt in the market | A funding hole, once the cheaper routes are closed |
| Equity cure | Nothing, where the documents give the right; the cure must sit inside their limits, commonly three or four over the loan and none in consecutive quarters | A one-off dip the shareholders are willing to bridge |
The price of a waiver or amendment is negotiable. The practitioner’s benchmark is that a well-handled amendment fee can often be held to twenty-five basis points or less, especially where the borrower brings a plan that reduces the lender’s risk rather than a request for more time (CAPX). The margin uplift is where the money sits over the life of the facility, so it is worth trading a slightly larger one-off fee for a smaller permanent step-up in the rate.
The equity cure is the remedy the borrower controls, and its limits are in the fine print. Most agreements cap cures at three or four over the life of the loan and bar them in consecutive quarters or twice in the same financial year (Osborne Clarke). Many also disallow an “over-cure”, an injection beyond the shortfall. It suits a one-off dip. Against a structural decline it defers the reckoning at the shareholders’ expense.
A breach forces a refinancing when the terms of the fix are worse than the market.
A single breach, waived and moved past, changes nothing about who funds you. It becomes a refinancing trigger in three situations. The first is when staying costs more than leaving: a waiver with a margin uplift, a heavy fee and covenants tighter than the market would offer a clean credit, for a business fundable elsewhere. The second is a breach that reaches other facilities through a cross-default clause. These are near-universal in leveraged lending, and the borrower-friendlier cross-acceleration variant bites only once the other lender has accelerated, which buys time to cure or negotiate (Practical Law). Where a breach cross-defaults into other facilities, a comprehensive refinancing may be the only way to draw a line under the whole structure at once.
The third is timing that was already against you. A large band of UK debt written in 2020 and 2021 is maturing across 2026 and 2027, including roughly £25.8bn of CBILS facilities on terms of up to six years, and borrowers are refinancing sub-2%, government-backed money into a market where the Bank of England base rate stands at 3.75% and the effective rate on new SME lending was around 6.11% in early 2026 (Bank of England). A breach on a facility due to mature into that repricing is often the moment to run a full process rather than patch the existing deal, while you still hold options. Delay closes them, because a lender that knows your maturity is weeks away, or that your covenant has tripped, prices that knowledge in.
The order of play, from the quarter-end to the fix.
As soon as the quarter’s management numbers are in hand, model the covenant and confirm whether you have tripped and by how much. If you have, work out your own remedy before you open the conversation, including what you can offer in return and whether an equity cure is worth using. Then approach the lender early with the diagnosis, a thirteen-week cash forecast and a plan, before the certificate makes the disclosure for you. Flagged early with a remedy attached, a breach stays a conversation; left for the lender to discover, it hardens into a problem.
Bring in an adviser before the lender. The terms agreed in the first fortnight tend to set the tone for everything that follows, and an adviser who has sat on the lender’s side of a business-support conversation knows which asks are routine and where a credit team will move. They can also tell you when the right answer is to refinance, to take less debt or to accept that the business carries more leverage than it can support.
If you have breached, or a test date is coming and the numbers look tight, the first conversation is confidential and without obligation. We will tell you plainly whether this is a bad quarter to be managed or a structure to be refinanced, and which moves keep the most options open. See how a mandate runs, or start below.
The terms in this guide
Each is defined in full in the library, with the levels and conventions that apply at £3-15m.
- Event of default
An event of default is a defined failure that gives the lender the right to act. It does not compel them to, and on a business still trading and paying interest, they almost never take the most drastic option available.