Financial Maintenance Covenant

Maintenance tests apply without a new transaction

That is the core distinction from an incurrence covenant. The borrower does not need to issue debt, pay a dividend or make an acquisition for the test to apply.

A quarterly leverage test can therefore create lender leverage simply because operating performance deteriorates.

Leverage and coverage tests are common

Current 2026 credit agreements continue to use maximum leverage ratios and minimum interest-coverage ratios.

The defined numerator and denominator matter. Net debt, first-lien debt, total debt and adjusted EBITDA can produce materially different covenant outcomes.

Springing covenants activate only at higher revolver use

Leveraged-loan structures often place a maintenance covenant only in the revolver and test it when revolving borrowings exceed a threshold such as 40% of commitments.

That preserves covenant-lite flexibility for the term loan while giving revolving lenders protection when liquidity usage rises.

Equity cures and waivers can prevent acceleration

Some agreements permit equity contributions to cure a financial covenant breach by increasing covenant EBITDA or reducing debt under defined mechanics.

Lenders can also waive or amend a covenant. A breach therefore does not automatically mean bankruptcy or immediate repayment, but it gives lenders contractual rights.

Maintenance-covenant headroom is often more useful than the covenant level alone

A maximum leverage covenant of 6.00× can look loose or tight depending on the borrower’s actual leverage. A company operating at 4.00× has 2.00 turns of headroom. A company already at 5.80× has almost none.

The same applies to coverage tests. The useful monitoring measure is the distance between actual covenant performance and the contractual threshold after applying the agreement’s EBITDA and debt definitions.

Stress testing should then ask how much EBITDA decline, debt increase or interest-rate movement would consume that headroom.

This turns the covenant from a static legal number into an early-warning indicator of how close the borrower is to needing a waiver, amendment, equity cure or operational response.

Common mistakes

Confusing maintenance with incurrence tests Maintenance covenants are recurring.

Using reported EBITDA instead of covenant EBITDA Adjustments can be extensive.

Assuming every leveraged term loan has a quarterly covenant Covenant-lite structures often do not.

Example

A credit agreement requires a maximum total leverage ratio of 3.50× and minimum interest coverage of 3.00× at each fiscal quarter-end. If leverage rises to 3.80×, the borrower can breach the maintenance covenant even if it has made every scheduled interest and principal payment.

Maintenance covenants are early-intervention tools. Their value depends on the ratio definition, EBITDA adjustments, testing frequency, cure rights, covenant holidays, step-ups and the consequences of breach.