You can measure the distance to covenant breach in three ways: in absolute terms (the gap between current gearing and threshold), in percentage (how much EBITDA can fall before breach), and in time (weeks to breach based on current trend). Most owner-CEOs answer 'how close?' with a single number—typically the absolute gap—and miss the operational picture. The time-based distance is the most action-oriented metric.
1. Distance in absolute terms
The difference between your current gearing and the covenant threshold.
Example: Gearing 3.2× – covenant 3.5× – absolute distance 0.3×.
This is the simplest measure. But it doesn't tell you how much the company's operations can deteriorate before impact.
2. Distance in percentage
How much can EBITDA fall before breach?
Example: Current gearing 3.2× = £40 million debt / £12.5 million EBITDA. To reach 3.5×, EBITDA must fall to 40/3.5 = £11.4 million. That's a decline of 8.6%.
Rule of thumb: If a single bad month can trigger breach, headroom is too low. If you need two quarters with results down around 10%, headroom is reasonable.
3. Distance in weeks
The most operational measure: How many weeks until breach at the current trend?
This requires you to project your EBITDA trend and debt development forward in time. That's what Covenant Horizon does automatically—but you can also calculate it yourself:
- Calculate your monthly EBITDA trend (most recent 3–6 months)
- Project EBITDA forward month by month
- Project debt forward (is it rising, falling, or stable?)
- Calculate gearing each month
- Find the month where gearing crosses the threshold
Which measurement method should you use?
All three provide insight—but the time perspective is the most action-oriented:
- Over 52 weeks: No immediate concern. Normal monitoring.
- 26–52 weeks: Attention. Monthly review.
- 13–26 weeks: Action. Begin dialogue with bank.
- Under 13 weeks: Critical. Actively negotiate waiver.
Why trend is more important than level
Two companies can both have gearing at 3.2×. But one has an upward EBITDA trend, the other downward. Same level—completely different risk. That's why the time-based distance is more important than the absolute figure.