A covenant waiver is a written dispensation from the bank that temporarily suspends a technical breach. Sometimes called a dispensation or forbearance, it's a written confirmation that the bank will not enforce their contractual rights when a covenant breach has occurred or is imminent. The waiver typically applies for a limited period — until the next test date or 6–12 months — and costs 0.1–0.5% of the loan amount.
Two types of waivers
Preventive waiver
You see the breach coming — typically within 8–12 weeks — and agree with the bank in advance that the breach will be accepted. This is the preferred variant. It signals control, transparency, and planning.
Reactive waiver (after-the-fact)
The breach has already occurred — often discovered during quarterly reporting. The bank issues a waiver to normalize the situation. More expensive, weaker negotiating position.
Rule of thumb: A preventive waiver typically costs 30–50% less in fees than a reactive one — and provides more flexible terms.
What does a waiver typically contain?
- Period: How long the dispensation applies (typically 1–2 quarters)
- Covenants covered: Which specific financial ratios may be exceeded
- Possible temporary threshold adjustment: E.g., gearing raised from 3.5× to 4.0× for a period
- Waiver fee: Fee for the bank allowing the exception
- Conditions: Reporting requirements, restrictions on dividends or capex
- Expiry and renewal terms: What happens after the period
When should you request a waiver?
The main rule is: as soon as you have a probable breach within 8–12 weeks and a realistic plan. Specifically:
- Covenant Horizon or other projection shows a breach date within the coming quarter
- You have an action plan with concrete measures
- You can demonstrate that the situation will typically normalize within 2–4 quarters
- You have documentation the bank can evaluate
Worked example: A manufacturing SME projects gearing will hit 3.6× in June (covenant threshold: 3.5×). They apply in April with a cost-reduction plan that will bring gearing to 3.2× by year-end. The bank grants a preventive waiver for Q2 and Q3, raising the threshold to 4.0× for those two quarters at a fee of 0.25% of the loan amount.
When should you not request a waiver?
- When there is substantial uncertainty whether operations can recover: Then a waiver is merely postponing the problem. Consider restructuring instead.
- When you don't have a plan: Banks rarely grant waivers to companies that don't know what they will do.
- When you've already had a waiver and the breach recurs: Signals that the plan doesn't hold. The bank will typically demand more dramatic changes.
The honest test
Ask yourself:
- Can I explain to the bank in concrete terms why the breach occurred and what has changed?
- Do I have a realistic timeline for returning below the threshold — and can I document it?
- Am I confident the same situation won't repeat itself in the next quarter?
If you answer no to any of these, a waiver may not be the right tool. Consider whether an amendment, equity injection, or restructuring is more appropriate.
Alternatives to a waiver
A waiver is not always the right solution. Other options:
- Amendment: Permanent modification of the loan agreement (new covenants, different structure)
- Refinancing: New loan to replace the existing one
- Restructuring: Comprehensive rebuilding of the capital structure
- Equity injection: Reduce debt and thereby gearing
Your advisor should discuss these options with you before you commit to a waiver.