Loan Covenant Compliance Checklist Template

The person preparing the covenant work starts the run for one facility and one test date. The answers on the first task assign every task, set each due date in business days back from the certificate deadline and add the year-end steps when the test date is a financial year end.

• Record the facility, the test date and who takes part — the borrower, the facility and its agent or lender, the test date, the deadline for the compliance certificate, whether it is a year-end test, and the people who prepare, check, advise and sign
• Confirm the delivery deadline and method in the agreement — the clause that sets when the compliance certificate and financial statements are due for this test date and how they are delivered: to the agent, through a lender portal or to a named address, in any form the agreement prescribes
• Check last period’s certificate and open items — the certificate delivered for the last test date, any query the agent or lenders raised, the conditions of any waiver still running and every action carried forward, so this period starts where the last one ended

Work from the signed documents, not from memory or last period’s spreadsheet. A covenant level, a definition or a basket can change with each amendment, and a waiver can come with conditions of its own.

• Pull the signed credit agreement and every amendment — the executed facility or credit agreement and each amendment, amendment and restatement or supplemental agreement, in date order, from the legal file rather than a draft or a summary
• Pull the waivers, consents and side letters in force — each waiver letter, consent and side letter, with what it covers, the test dates it applies to and any condition attached, such as a fee, a reporting duty or a level that applies instead
• Note the definitions the covenants use — the agreement’s own definitions for each figure in the tests, such as EBITDA, net debt, finance charges, cash flow and the relevant period, with every adjustment, add-back and cap they allow
• Confirm the group and the accounting basis the tests use — which companies the tests cover, whether they are measured on the group’s consolidated accounts, and whether the agreement fixes the accounting principles at a date so later changes in accounting standards do not move the covenants

List everything the facility asks of the borrower for this period, not only the ratios. Information undertakings, negative covenants and baskets, insurance and notice duties are covenants too, and the agreement decides what happens if one is missed.

• List the financial covenants and their levels for this test date — each financial covenant, such as leverage, interest cover, cash flow cover, minimum liquidity or a capital expenditure limit, with the level the agreement sets for this test date, since levels can step up or down over the life of a facility
• List the information undertakings and their due dates — every deliverable the agreement requires, such as quarterly and annual financial statements, the compliance certificate, a budget or business plan and other information the agent asks for, with its due date and form
• List the negative covenants and their baskets — the restrictions on the borrower, such as the negative pledge and limits on disposals, other borrowing, guarantees, loans, acquisitions and distributions, with each permitted basket and its limit
• List the insurance and other undertakings — the undertakings the borrower must keep to, such as keeping insurance in place, maintaining authorisations, complying with laws and sanctions rules, any hedging the agreement requires and conditions still to be met after signing
• List the notice duties — the events the borrower must tell the agent or lender about, such as a default, litigation, a change of control or a change in the business, with the time the agreement allows for each
• Record the covenant register for this test date — one row per covenant or undertaking with its clause, its level, limit or due date, its owner and its status, which is the list the rest of the run works through

Calculate each test on the agreement’s definitions from final figures, then work out the headroom and look ahead to the next test dates. At a financial year end, two more tasks check the covenant notes in the accounts and tie the figures to the audited accounts.

• Confirm the period’s figures are final — the management accounts for the test period closed and reviewed, or at a year end the audited accounts or the draft the auditors are working on, with the relevant period the test measures, such as the last twelve months, built from them
• Build each figure from the agreement’s definitions — each input, such as EBITDA, net debt or finance charges, calculated as the agreement defines it rather than as the management KPI of the same name, with a line for each step from the accounts
• Apply only the adjustments the agreement allows — each adjustment or add-back, such as an exceptional item or a pro forma figure for an acquisition or disposal, checked against the clause that allows it and any cap, with its support
• Calculate each covenant against its level — each ratio or test worked out, compared with the level for this test date from the register and marked met or not met, with the calculation kept in the workpaper
• Work out the headroom on each covenant — how far each figure could move before the test fails, such as how much EBITDA could fall or net debt could rise, in money and as a percentage
• Project the next test dates from the forecast — the next one or two test dates worked out from the latest forecast and the levels that will apply then, so a breach that is coming shows up while there is time to act
• Year-end: check the covenant notes before the accounts are signed — the notes about covenants on loans classified as non-current checked against these calculations, and any breach or waiver discussed with the auditors before the accounts are signed
• Year-end: reconcile the covenant figures to the audited accounts — each figure in the calculations traced to the audited financial statements, with any audit adjustment carried into the tests and the tests worked out again

Run these checks alongside the calculations in Phase 4: what each basket has used, whether every deliverable and notice went on time, whether insurance and the other undertakings are met, and whether other borrowing is in good standing. A second person checks the calculations, then the conclusion task records the result, and its answer adds the escalation steps.

• Check the usage of each basket against its limit — for each permitted basket, such as other borrowing, disposals, distributions, acquisitions or guarantees, what has been used to date, what remains and when it resets, with each transaction in the period that used it
• Check every information undertaking was met on time — each deliverable due since the last test date delivered by its date and in its form, with anything missed or late listed
• Check insurance and the other undertakings — the insurance the agreement requires in force with the cover it asks for, and each other undertaking in the register checked for the period
• Check whether any notice was due in the period — each event on the notice list checked for the period, with any notice given recorded and any notice that should have been given raised with the CFO straight away
• Check other debt for cross-default — the group’s other borrowing, such as other loans, notes, leases and hedging, checked for a missed payment, a breach or an acceleration that this agreement’s cross-default clause would pick up, with that clause’s threshold
• Check the covenant calculations before the conclusion — a second person in finance goes through each figure, adjustment, ratio and headroom against the agreement’s definitions and the accounts, so a breach or tight headroom is never reported to the CFO or the lenders on an unchecked calculation
• Conclude on compliance for the test date — the results read together: every financial covenant, basket, undertaking and notice met or not, the headroom and the projection, and one answer that decides whether the escalation steps are added

Applies only when the conclusion records tight headroom, a projected failure or a breach. Raise it with the CFO at once and, in a breach, agree the route with legal counsel and approach the agent or lender before the certificate deadline. These steps sit before the sign-off, so none of them waits for it.

• Escalate to the CFO with the figures and the projection — the covenant affected, the figures, the headroom or shortfall, the projection for the next test dates and what is driving it, raised with the CFO as soon as the conclusion is reached
• Agree the response with the CFO — the actions agreed, such as a change to the plan or to cash management, an early conversation with the agent or lender, or a request for a waiver or amendment, with who does what by when
• Breach: check the cure, waiver and amendment terms — what the agreement allows: any cure right or grace period, what counts as a default, who must consent to a waiver or amendment, such as the majority lenders, and what notice is required
• Breach: notify the agent or lender as the agreement requires — the notice of the breach or default the agreement asks for, given in its form and within its time, once legal counsel has agreed the wording
• Breach: request a waiver or amendment — the request sent through the agent, or to the lender for a bilateral facility, with the figures, the cause, the proposed waiver, reset levels or other terms, and the date a response is needed by
• Breach: check the effect on other debt and hedging — whether the breach is a default or a cross-default under any other loan, note, lease or hedging agreement, and any notice those agreements require
• Breach: tell the auditors and check the accounting effect — the breach and any waiver discussed with the auditors, including how they affect the classification of the loan as current or non-current and what the notes must say
• Breach: record the lenders’ response — the waiver, amendment or other answer received, signed and dated, with its conditions and any fee, added to the covenant register, or the position written down if no answer has arrived

Prepare the certificate in the agreement’s form with every figure from the workpaper, have a second person check it, and get it signed. The CFO’s sign-off is the gate: nothing in Phase 8 can be completed until it is done.

• Prepare the compliance certificate in the agreement’s form — the form attached to the agreement, with each covenant’s figures and result from the workpaper and any confirmation the form asks for, such as that no default is continuing, given only if it is true
• Attach the supporting calculations and schedules — the calculations, reconciliations and any schedules the agreement asks to go with the certificate, agreed to the figures in it
• Check the certificate and the workpaper — a second person in finance checks each figure back to the accounts and the definitions, the levels against the register and the statements in the certificate against the conclusion, with any query answered
• Year-end: check whether the auditors must report on the certificate — if the agreement asks for the auditors to report on the year-end certificate or its calculations, the auditors’ report requested in time and attached
• Certificate not approved: make the changes the CFO asked for — each change the CFO recorded on the sign-off task made to the certificate, the calculations or the conclusion, then this task completed and the certificate passed back to the CFO
• CFO signs off the compliance certificate — the certificate, the calculations and the conclusion approved and the certificate signed by the CFO or the officer the agreement names; if it is not ready, choose Not approved and leave this task open, because nothing in Phase 8 can be completed until it is done

Deliver the signed certificate and financial statements by the deadline, answer any query, file the workpaper and set up the next test date, so the next run starts from an up-to-date register.

• Deliver the certificate and financial statements by the deadline — the signed certificate, the financial statements and any schedules delivered to the agent or lender in the way the agreement requires, with the date and the proof of delivery kept
• Answer any query from the agent or lenders — each question on the certificate or the figures answered and recorded, with any correction agreed with the CFO before it is sent
• Breach: add the waiver’s conditions to the next test — each condition of the waiver or amendment, such as a reporting duty, a fee or a new level, added to the register and to the next run with its date
• File the workpaper with the period’s records — the agreement extracts, the register, the calculations, the certificate, the approvals, the proof of delivery and any waiver kept together for the test date
• Set the next test date and its deadline — the next test date and certificate deadline from the agreement, the next run started or scheduled, and each deliverable due before then given a date and an owner