Negotiating a covenant waiver happens in six steps: document the situation with numbers and projection, contact the bank proactively before breach, present a realistic mitigation plan with concrete actions and timeline, negotiate terms, formalize the agreement in writing, and follow up with monthly reporting that shows the plan is holding. The better prepared you are with data and a credible plan, the better terms you can obtain. Before you contact the bank, you need to have your numbers straight. Not their numbers — yours. Exactly as the bank will calculate them.
Step 1: Document the situation
Before you pick up the phone, gather the hard data:
- Current gearing, interest coverage, and other covenant ratios
- Projection of when (and whether) breach will occur
- Sensitivity analysis: what if EBITDA drops 10%?
- Cash flow projection for the next 6–12 months
This is where Covenant Horizon and similar tools save you weeks.
Step 2: Contact the bank proactively
The most important decision: contact the bank before breach, not after. Call your relationship manager. Request a meeting. Frame it as:
"We've run a projection showing we may come close to the covenant threshold in 3–4 months. We'd like to discuss the situation and our plan — before it becomes urgent."
This shifts the conversation from reactive to strategic. The bank appreciates being informed early.
Step 3: Present a realistic plan
The plan must have four elements:
- What has happened — without excuses, but with explanation
- What you will do — concrete actions, owner, deadline
- Expected impact — what does it mean for EBITDA, debt, and gearing
- What you need from the bank — waiver, amended covenants, time
What the bank is looking for: Consistency. Has your plan held in the past? Have you been honest? The bank bases its assessment at least as much on credibility as on numbers.
Step 4: Negotiate the terms
A waiver is a negotiable agreement. The bank will typically require:
- Waiver fee: Often a small percentage of the loan amount. Negotiate this.
- Tightened covenants: Temporarily or permanently.
- Higher interest rate: Negotiate whether it's permanent or until breach is cured.
- More frequent reporting: Monthly instead of quarterly.
- Additional collateral or guarantees: Try to limit the scope.
- Restrictions on dividends, capex, acquisitions: Time limit important.
You can negotiate all of these. Not necessarily all at once — but identify what's most important for your flexibility.
Step 5: Formalize in writing
A waiver must always be in writing. A verbal agreement is no agreement. Ensure that:
- The waiver period is clearly defined (e.g., "until next test date Q4 2026")
- New covenant levels are clearly stated
- Any reporting requirements are operationalized
- Cross-default clauses are addressed
Have your lawyer review it.
Step 6: Deliver on your promises
The biggest mistake: getting the waiver and then relaxing. The bank is watching. If the plan doesn't hold, the next round will be harder.
Send proactive monthly updates even if not formally required. Show that you're in control. It builds trust for the next negotiation.
The honest test
- Can you explain the breach cause in two sentences without blaming external factors?
- Have you identified three concrete actions with deadlines and owners?
- Will you commit to monthly reporting even if the bank doesn't require it?
Worked example: Manufacturing SME with seasonal cash pressure
A manufacturing company with annual revenue around €15M faced a gearing covenant of max 3.0x. Due to delayed customer payments and inventory buildup, their gearing was projected to hit 3.2x at the next test date in three months.
The owner-CEO contacted the bank six weeks before the test date with:
- A 12-month cash flow projection showing the breach and recovery
- A plan to accelerate collections and reduce inventory by 15% over four months
- A request for a one-quarter waiver with monthly reporting
The bank granted the waiver with a small fee and required monthly covenant reporting. The company delivered on the plan, and gearing was back below 2.8x within five months. The early contact and credible plan made the difference.