The first 72 hours after you discover covenant breach risk should typically be spent on: (1) verifying the numbers — is the breach real and when will it occur, (2) reading the loan agreement and identifying what rights the bank gets, (3) informing the board with a clear analysis, (4) creating an action plan with realistic measures, (5) contacting your advisor or lawyer, and (6) booking a meeting with the bank. The key principle is to act quickly, document thoroughly, and communicate proactively. Silence or delay is often the worst thing you can do.
First 24 hours: Verification
1. Check the numbers one more time
Before you alarm anyone: verify that the breach calculation is correct. The typical errors:
- Bank EBITDA vs. internal EBITDA (different add-backs)
- Net debt vs. gross debt
- Incorrect monthly trend assumption
- Non-updated debt figures from credit facility
2. Read your loan agreement
Find the actual text in the loan agreement. What does it say about:
- Definition of covenants and limits
- Test dates (monthly/quarterly)
- Consequences of breach
- Cross-default clauses
- Grace periods or cure rights
24–48 hours: Board and advisor
3. Inform the board
Send a written analysis to the board. Not a rumor, not in a meeting walkthrough — a formal note with:
- Current figures
- Projected breach date
- Scenarios (base, upside, downside)
- Proposed action plan
- Your proposal for next steps
The board will ask: When did you discover this? Could you have seen it earlier? Is there anything else we don't know? Be prepared with honest answers.
4. Contact advisor and lawyer
You need both. The advisor helps with the financial plan and bank dialogue. The lawyer helps with interpretation of the loan agreement and waiver text.
48–72 hours: Plan and bank dialogue
5. Create an action plan
The plan must be specific. Not "we will cut costs" — but:
- Measure 1: Reduce inventory before Q4 → frees up capital
- Measure 2: Postpone planned capex projects → preserves cash
- Measure 3: Negotiate longer payment terms with top suppliers → improves cash flow
Each measure must have: responsible person, deadline, impact on EBITDA/debt/gearing.
6. Book meeting with the bank
Call your relationship manager. Ask for a meeting within 1–2 weeks. Frame it as an update — not an alarm.
Prepare the materials you'll bring:
- Current situation analysis
- Action plan
- Sensitivity analysis
- Request for waiver or amendment
Worked example: Manufacturing SME with gearing breach
A manufacturing company with revenues around €20M discovered in March that their gearing would breach the 3.0× limit by June. Net debt was €8.5M against an EBITDA trending toward €2.7M.
Day 1: CFO verified calculation with controller. Checked loan agreement: quarterly test, 10-day cure period, bank's right to accelerate repayment.
Day 2: Board memo sent with three scenarios. Base case: breach by mid-June. Upside: if Q2 margins hold, breach delayed to July. Downside: if one major customer delays payment, breach in May.
Day 3: Advisor engaged. Lawyer reviewed loan agreement. Action plan drafted: freeze two equipment purchases (€800K), accelerate collection on overdue invoices (€400K), negotiate supplier payment extension (30 days on top-5 suppliers).
Week 2: Bank meeting scheduled. Materials included covenant trend chart, action plan with timelines, and formal waiver request for Q2 test date.
Outcome: Bank granted 90-day waiver with monthly reporting requirement. Company executed plan, gearing dropped to 2.8× by September.
The honest test
Three questions to ask yourself:
- Have I documented the breach risk in writing to the board within 48 hours? If not, you are creating personal liability risk.
- Do I have a written action plan with named owners and deadlines? Verbal plans are not plans.
- Have I contacted the bank proactively, or am I waiting for them to discover it? The bank will always prefer to hear it from you first.
What you should NOT do
- Silence: "Maybe it will fix itself" is often the worst strategy. The bank will discover it sooner or later.
- Optimism bias: Don't promise things you're not certain you can deliver.
- Blame: "The market", "competitors", "suppliers". Focus on what you are doing.
- Fragmented communication: Not scattered emails. One consolidated briefing.
Typical timeline for breach response:
- Day 0: Discovery
- Day 1: Verification + loan agreement review
- Day 2: Board memo + advisor contact
- Day 3: Action plan draft
- Week 2: Bank meeting
- Week 3–4: Waiver negotiation
- Month 2–3: Execute plan, report progress
The companies that handle covenant breaches well share one trait: they act immediately. The 72-hour window is not arbitrary — it's the period where you still control the narrative.