Resources·for portfolio companies
Preparing your first covenant certificate
A walkthrough for finance teams doing this for the first time after taking on PE or lender-backed debt, covering what the certificate actually contains, how the numbers get checked, and the mistakes that show up most often in a first submission.
Somewhere in your facility agreement or investment agreement is a clause requiring you to certify covenant compliance on a fixed schedule, usually quarterly. The first time this deadline arrives, most finance teams discover that "the covenants" mentioned in the legal document were never translated into a template anyone actually knows how to fill in.
This is not a board pack, and it is not the same document as your monthly management accounts. It is a specific, contractually defined deliverable with its own structure. Getting that structure right the first time avoids a round of back-and-forth with your lender or GP that eats into the time you have before the next one is due.
What a covenant certificate actually is
A covenant certificate is a signed statement, usually from the CFO or a director, confirming whether the company is in compliance with each covenant set out in its facility or investment agreement, backed by the calculations that support that conclusion. It typically covers two distinct sets of covenants that are easy to conflate:
from the loan agreement
Lender covenants
Set by your bank or lender, such as leverage, interest cover, and minimum cash. You own the definitions and the calculation, because you agreed them when the facility was signed.
from the shareholders' agreement
Investor covenants
Set by your fund. Your GP defined the thresholds; you report the underlying figures, and the fund's own systems typically evaluate them against the agreed terms.
A more detailed breakdown of how these two ownership models work across a portfolio is inhow funds track covenant compliance, useful background if you want to understand why your GP is asking for this in the format they are.
The five things every certificate needs
| Section | What goes in it |
|---|---|
| Period covered | The exact test date and reporting period: quarter end, or LTM window if that's how the covenant is defined. |
| Covenant calculations | Each covenant, the threshold, and the actual figure, such as net debt / EBITDA, interest cover, minimum cash, whatever applies to your facility. |
| Compliance statement | An explicit pass/fail statement for each covenant, not just the numbers, but a clear conclusion drawn from them. |
| Supporting workings | The backup schedule showing how each figure was derived from the underlying financials, such as EBITDA add-backs, debt schedule, cash reconciliation. |
| Signature and date | Signed by whoever the facility agreement specifies, usually the CFO, sometimes requiring a director alongside them. |
Building the calculation schedule
The supporting workings are where most of the actual effort goes. A worked example for a typical leverage covenant:
Covenant: Net debt / EBITDA ≤ 3.5x, tested quarterly on an LTM basis
Step 1: LTM EBITDA
Sum the last 12 months of EBITDA from the management accounts, applying the add-back policy agreed with your lender.
Step 2: Net debt at test date
Total drawn debt (term loan, RCF, other facilities) minus cash and cash equivalents, as at the quarter-end balance sheet date.
Step 3: Ratio
Net debt ÷ LTM EBITDA. Compare to the 3.5x threshold and state the result.
The same three-step structure applies to other covenant types. Only the formula changes:
Covenant: Interest cover ≥ 3.0x, tested quarterly on an LTM basis
LTM EBITDA ÷ LTM net interest expense. Compare to the 3.0x threshold.
Covenant: Minimum cash ≥ €500k, tested at each quarter end
Closing cash and cash equivalents at the test date. Compare directly to the floor: no ratio, no LTM window.
Keep this schedule in the same format every quarter. A reviewer, such as your lender, your GP, or your own auditor, should be able to trace every figure in the certificate back to a specific line in your management accounts without asking you to explain it.
Where first submissions go wrong
Using a different EBITDA definition than the one agreed
If the facility agreement specifies which add-backs are allowed, use exactly that list, not whatever adjustments happen to be in this quarter's management accounts.
Submitting figures with no supporting workings
A certificate with just a final ratio and no backup schedule invites questions and delays sign-off. Include the workings even if they weren't explicitly requested.
Treating a narrow pass as a non-event
A covenant passing by a small margin is worth flagging proactively to your GP or lender, rather than submitting it silently and letting them notice. A conversation now is easier than one after a breach.
Missing the comparative period
Most lenders expect to see the prior period's figures alongside the current ones, so a trend is visible, not just a single snapshot.
Running the LTM window on the wrong entity scope
If the company made an acquisition or disposal mid-period, the LTM figures need the same entity scope throughout the window. Mixing pre- and post-acquisition financials silently distorts both EBITDA and net debt. See consolidated reporting across a multi-country portfolio for the wider version of this problem.
Before you submit
- -Test date and period match exactly what the facility agreement specifies
- -Every covenant listed in the agreement is addressed, not just the ones you know you'll pass
- -EBITDA and net debt definitions match the agreed policy, not this quarter's convenience
- -Supporting workings are attached, not just the final ratios
- -Comparative period figures are included, using the same EBITDA/net debt definitions as the current period, restated if the add-back policy changed mid-year
- -The right person has signed and dated it
AHQ Financials builds the certificate from your live data
Define your covenants once in AHQ Financials and headroom, supporting workings, and the compliance statement are generated automatically from the same numbers you already report each month, no separate spreadsheet to rebuild every quarter.