To calculate your breach date, project EBITDA and debt forward month by month until gearing crosses the covenant threshold. You need three inputs: current LTM EBITDA, current debt, and the covenant threshold. Then apply your monthly trend to forecast when the ratio breaches.
What you need
- Current LTM EBITDA (last twelve months EBITDA, rolling)
- Current debt (per the bank's definition — net debt or gross debt)
- Covenant threshold (e.g., 3.5× gearing)
- Monthly EBITDA trend (decline or increase in EBITDA per month)
Step 1: Calculate your current gearing
Example:
- LTM EBITDA: kr. 12.5 million
- Debt: kr. 40 million
- Gearing: 40 / 12.5 = 3.2×
- Covenant: 3.5×
- Headroom: 0.3× (9%)
Step 2: Estimate your EBITDA trend
Look at the last 3–6 months. Is EBITDA declining, increasing, or stable? Calculate a monthly trend.
If EBITDA is falling kr. 15,000 per month, it means that LTM EBITDA over 12 months falls by ~kr. 180,000. But remember that LTM rolls: each new month with lower EBITDA replaces a month from a year ago. The effect is gradual, not linear.
Simplified approximation: If the EBITDA trend is a constant −kr. 15,000/mo., and you want to know when LTM EBITDA hits a specific level, you simply draw down LTM EBITDA linearly (not monthly EBITDA linearly). This simplification is okay when the trend is stable.
Step 3: Find threshold EBITDA
What EBITDA triggers a breach?
EBITDA at breach = Debt / Covenant = 40 / 3.5 = kr. 11.43 million
In other words, EBITDA must fall from 12.5 to 11.43 — a decline of kr. 1.07 million (−8.6%).
Step 4: Calculate time to breach
If LTM EBITDA falls ~kr. 15,000/mo., it takes 1,070,000 / 15,000 = about 71 months to reach the threshold. That's far away. Breach is not an immediate risk.
But if the monthly trend is −kr. 100,000/mo., it's 1,070,000 / 100,000 = 10.7 months. That's 46 weeks. Time to act.
Worked example: a distribution SME
A wholesale company has LTM EBITDA of kr. 8.2 million, debt of kr. 24 million, and a covenant of 3.0× gearing. Current gearing is 2.93×. Headroom is 0.07× (2.4%).
Over the past four months, EBITDA has declined kr. 60,000/mo. on average. The owner-CEO wants to know when the breach occurs.
Step 1: Threshold EBITDA = 24 / 3.0 = kr. 8.0 million.
Step 2: EBITDA must fall kr. 200,000 (from 8.2 to 8.0).
Step 3: At −kr. 60,000/mo., that takes 200,000 / 60,000 = 3.3 months.
The company has about 14 weeks before the breach. The CEO must either stabilize EBITDA or renegotiate the covenant now.
The honest test
- Do you know your monthly EBITDA trend over the past six months?
- Have you calculated threshold EBITDA for each covenant in your loan agreement?
- Do you know how many months of runway you have before the next test date?
If you answered no to two or more, you are flying without instruments.
Important sources of error
- LTM vs. monthly EBITDA: The trend on monthly EBITDA is not the same as the trend on LTM EBITDA. Understand which is used in your covenant.
- Debt trajectory: Debt must also be projected. If it increases (due to further drawdowns), you hit the breach faster.
- Seasonality: If the business has strong seasons, individual months can pull the number in the wrong direction temporarily.
- Bank EBITDA vs. internal EBITDA: Make sure you use the same definition as the bank.
When it becomes too complex to do manually
The manual calculation can work fine as a rough estimate. But if debt is also changing, if test dates are quarterly, if there are add-backs, or if you want to run multiple scenarios — it quickly becomes unwieldy.
That's where breach-date forecasting becomes a monthly check, not a spreadsheet exercise.