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Covenant Headroom Forecast by Quarter
Headroom measured against the schedule in your agreement, not a flat line, with the cure priced and the open quarter's number named.
River's headroom forecast reads the covenant definitions and your current forecast, then tests every remaining date against the threshold in force on that date. What comes back is a headroom sheet with the calculation shown at each test, a ranked list of the operating events consuming the cushion, and one board slide carrying the cliff. Where a test fails, the cure is priced both ways the clause allows, against the number of cures your agreement has left.
Every headroom tracker on this query extends a ratio trend against one fixed threshold. Real thresholds are neither fixed nor monotone. Hasbro's revolving facility permits leverage of 3.50 times in the first, second and fourth quarters of a year and 4.00 in the third. A second schedule in the same amendment steps 3.80, then 4.30, then 3.50 across three consecutive test dates. A trend line gets the quarter wrong in both directions.
Written for the CFO who has to raise this at a board meeting while there is still room to act, and for the controller who certifies the number. It runs on the definitions the covenant definition extractor resolved, so headroom is measured on the agreement's arithmetic rather than a textbook ratio. The lender reporting package is where the certificate lands, and the 13 week cash flow forecast is where a debt paydown gets a week. The board slide comes out beside the variance narrative rather than after it.
Three quarters of the test are already closed
A leverage covenant tested on trailing twelve month earnings is three quarters decided by the time the cushion is visible. Standing at the September test in the worked example, the December window already holds 16,400,000 of closed quarters, so the only movable number is what December itself produces. Required is 8,800,000 against a forecast of 6,600,000 and a company record of 7,100,000. Headroom expressed as a percentage never says that.
A cure is rationed and priced by the clause, not by the size of the miss. One filed facility applies the cure as a reduction of net borrowings rather than an addition to earnings, and permits only as much as compliance requires. The same clause allows 45 business days, bars two cures in consecutive periods, and caps the facility at two in total. Under that wording the December miss costs 8,250,000 of cash. Under an earnings cure it costs 2,200,000. Same breach, and the ratio between the cheques is the covenant level.
The consecutive rule is the finding nobody models. December and the following March both fail in the worked example, and a facility that bars cures in consecutive periods can only fix one of them. That turns a financing question into a March operating plan, six months early. The ranked list behind it says the same thing: the covenant step from 4.75 to 3.75 consumes a full turn, which is more than every operating event in the period put together.
How it works
Add the definitions
Paste the covenant terms and thresholds, or the agreement itself if the schedule is buried.
Add the forecast
Your current numbers by quarter, whatever shape they are in, plus the closed quarters behind them.
River tests every date
Each remaining test runs against the threshold in force then, with the arithmetic shown.
Take the slide
Bring the cliff, the ranked causes and the priced cure into the next board meeting.
What you get
- Every test date measured against the threshold in force on that date, not a flat line
- Seasonal and stepped schedules read out of the agreement, including the quarters that loosen
- The earnings the one open quarter must produce, set against the best quarter you have recorded
- Operating events ranked by the turns of leverage each one consumes at the failing test
- The cure priced under both conventions, against the number your facility has left to spend
- One board slide carrying the cliff, the quarter it lands, and the decision being asked for
Common questions
Why is the breach quarter not the quarter with the worst ratio?
Because the threshold moves. In the worked example September carries the worst ratio of the five test dates and clears with the widest cushion, since the covenant loosens for the seasonal build. December carries a better ratio and fails, because the schedule drops a full turn on the same day.
What does the trailing window change about the answer?
It decides how much of the test is still open. At the September test, three of the four quarters feeding December are already closed, so 16,400,000 of the trailing figure is fixed. The only question left is what the fourth quarter produces, and that number is worth naming out loud.
How do you price a cure without seeing my agreement?
You give it the clause and it prices both conventions. Applied as a reduction in net borrowings the December miss takes 8,250,000. Applied as an addition to earnings it takes 2,200,000. The gap between them is exactly the covenant multiple, so which sentence governs is worth more than any forecasting assumption.
Does it handle springing tests and thresholds that step?
Both, and they are the reason the tool exists. A stepped schedule gets read out into a threshold per test date, including the quarters that loosen. A springing test carries the condition that turns it on, so it appears with its trigger rather than sitting dormant and unnoticed until it fires.
Can I run downside cases?
Yes, and the useful ones are narrow. Rather than a blanket revenue haircut, name the events: a customer slipping a quarter, a price increase held back, capex funded on the revolver. Each comes back with the turns it consumes at the failing test, so the mitigation list sorts itself.
What do I actually take to the board?
One slide with the cliff, the quarter it lands, the ranked causes and the priced cure, plus speaker notes carrying the decision. It sits in the finance section of the board reporting alongside the compliance certificate, so the lender conversation and the board conversation run off the same figures.
Does this leverage ratio feed any other mandatory calculation?
Often the same one. A first lien or total leverage covenant and the Applicable ECF Percentage step-down are frequently keyed to the identical ratio, just tested on different dates. Forecast the ratio here first, then run the result through the excess cash flow calculation pack to see which tier of the mandatory prepayment grid this fiscal year sets.
Covenant Headroom Forecast by Quarter
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