What is a debt covenant?
A debt covenant is a condition in a loan agreement, such as a maximum ratio of debt to EBITDA, that the borrower must meet to avoid default. Positive covenants require actions, such as delivering audited financial statements. Negative covenants restrict actions, such as new borrowing, dividends or asset sales. Financial covenants test ratios like debt to EBITDA or interest coverage.
Why it matters to a revenue leader
PE-backed companies carry meaningful debt, so covenants turn the revenue forecast into a lender issue. A breach can bring penalties, higher interest or a demand for repayment, and it puts the sponsor in a hard conversation with its lenders. That is why the CFO wants a forecast the CRO will stand behind: covenant math runs on EBITDA, and EBITDA starts with revenue.
Example
Fictitious numbersA commercial plumbing company has $50M of debt and a covenant capping debt at 5.0 times EBITDA. With EBITDA of $11M, the ratio is about 4.5 times. If a revenue shortfall drops EBITDA to $9.5M, the ratio rises to about 5.3 times and breaches the covenant.
"How far can revenue fall below forecast before we approach a covenant limit?"
Sources
- Debt Covenants checked 9 Oct 2026
- Interagency Guidance on Leveraged Lending (Federal Reserve, 2013) checked 9 Oct 2026