Covenant Breach
Also known as: Covenant Default, Loan Covenant Breach
Definition
A covenant breach occurs when a borrower fails to satisfy a requirement in its debt documents, such as liquidity, EBITDA, leverage, reporting, or budget compliance. In a turnaround, covenant risk changes the decision cadence because lenders can gain approval, waiver, pricing, or enforcement leverage.
Covenant breach risk should be managed before the breach date. Waiting until the package is due usually gives the lender more leverage and management fewer options.
The practical tool is a weekly cash and covenant forecast tied to a lender communication plan.
Related terms
- 13-Week Cash Flow — A rolling short-term cash forecast used to manage liquidity, runway, lender discussions, and turnaround decisions.
- Cash Runway — The number of months a company can operate before cash runs out at the current burn rate.
- Lender Forbearance — A lender's temporary agreement not to exercise remedies after a default or covenant issue.
Where this gets applied
- Unit Economics — CAC payback, NRR, gross margin by segment, cohort analysis, paid-on-bookings vs. paid-on-cash.
- Financial Infrastructure — ARR waterfalls, deferred-revenue rules, board-pack standardization, FP&A architecture.
- Project Recovery — Stalled programs unblocked. We've rescued $13M and $3M Fortune 500 initiatives in under 30 days.