Debt Covenants: Navigating Debt Covenants with the Help of EBITDA Metrics

1. Introduction to Debt Covenants and Their Importance

Debt covenants are essential tools used by lenders to set performance benchmarks and financial health indicators for borrowers. They are contractual agreements embedded within the terms of debt instruments that can significantly influence the behavior and financial decisions of a borrowing entity. By stipulating certain conditions that the borrower must adhere to, debt covenants serve as a protective mechanism for lenders, ensuring that the borrower maintains a certain level of operational and financial discipline. These covenants can be affirmative, requiring the borrower to perform specific actions, or negative, restricting the borrower from certain activities. The importance of debt covenants cannot be overstated, as they provide a framework within which the borrower must operate, thereby reducing the lender's risk exposure.

From the perspective of lenders, debt covenants are a risk management tool. They allow lenders to monitor the borrower's performance and intervene if certain predetermined thresholds are breached. For instance, a common covenant might require the borrower to maintain a minimum interest coverage ratio, ensuring that the entity generates sufficient earnings to cover its interest expenses. This is crucial for lenders as it provides early warning signs of financial distress, allowing them to take corrective actions before the situation deteriorates further.

Borrowers, on the other hand, may view debt covenants as a double-edged sword. While these covenants can restrict a company's operational freedom, they also signal to the market that the borrower is committed to maintaining a solid financial footing. Compliance with debt covenants can enhance a borrower's creditworthiness and potentially lead to more favorable borrowing terms in the future.

Here are some in-depth insights into the role and impact of debt covenants:

1. Monitoring and Compliance: Debt covenants require regular monitoring of financial metrics, such as the debt-to-equity ratio, current ratio, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Compliance with these metrics reassures lenders of the borrower's financial stability.

2. Borrower's Discipline: By adhering to debt covenants, borrowers are often compelled to operate within a disciplined financial framework, which can lead to more prudent management decisions and strategic planning.

3. Flexibility and Negotiation: Covenants can sometimes be renegotiated if a borrower's financial situation changes significantly. This flexibility can be critical during unexpected economic downturns or shifts in market conditions.

4. Impact on Valuation: The presence of stringent covenants can affect the perceived risk of a debt instrument, thereby influencing its valuation. For example, a bond with tight covenants might be seen as less risky, potentially leading to a lower yield and higher price.

To illustrate the practical application of debt covenants, consider a company that has taken on a significant amount of debt to finance its expansion. The lender might include a covenant that limits the company's ability to incur additional debt without prior approval. This restriction ensures that the company does not over-leverage itself, which could jeopardize its ability to service existing debt and potentially lead to bankruptcy.

Debt covenants play a pivotal role in the lending landscape. They balance the interests of lenders and borrowers, promote financial stability, and encourage responsible corporate behavior. As companies navigate their financial journeys, understanding and managing debt covenants—particularly through key metrics like EBITDA—become crucial elements of strategic financial management.

2. Understanding EBITDA and Its Role in Debt Agreements

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is a widely used metric for assessing a company's operating performance. It strips out the cost of capital investments, tax structures, and financing strategies to provide a clear view of a business's profitability from its core operations. In the context of debt agreements, EBITDA serves as a crucial barometer for lenders to evaluate a company's ability to generate enough cash to service its debt. It's a key component in debt covenants, which are agreements between a company and its lenders that stipulate certain financial thresholds the company must maintain.

From the perspective of lenders, EBITDA is important because it offers a snapshot of a company's current operational profitability and cash flow potential without the noise of accounting and tax strategies. This helps in determining whether a company can cover its interest payments and principal repayments. On the other hand, companies benefit from using EBITDA in debt covenants as it allows for greater flexibility in managing their finances and investments without immediately affecting covenant metrics.

Here's an in-depth look at the role of EBITDA in debt agreements:

1. debt Service Coverage ratio (DSCR): This ratio uses EBITDA to measure a company's ability to service its debt. It is calculated as EBITDA divided by total debt service obligations. A higher DSCR indicates better financial health and a lower risk of default.

2. Interest Coverage Ratio (ICR): EBITDA is also used to calculate the ICR, which is EBITDA divided by interest expenses. This ratio shows how many times a company can cover its interest payments with its operational earnings, which is a key concern for creditors.

3. leverage ratios: Leverage ratios, such as debt-to-EBITDA, provide insights into the amount of debt a company has in relation to its earnings. Creditors use this ratio to assess the risk level of extending further credit or loans.

4. Covenant Thresholds: Debt agreements often set specific EBITDA thresholds that a company must meet or exceed. Falling below these thresholds can lead to a breach of covenant, potentially resulting in penalties or renegotiation of terms.

5. EBITDA Add-backs: Sometimes, certain expenses can be added back to EBITDA to present a more favorable picture. These adjustments are negotiated during the debt agreement process and can include one-time costs or non-operational expenses.

Example: Consider a manufacturing company that has taken on a significant amount of debt to finance a new production line. The debt agreement includes a covenant requiring the company to maintain a DSCR of at least 1.5. The company's EBITDA for the fiscal year is $10 million, and its annual debt service is $6 million. The DSCR would be calculated as follows:

$$ DSCR = \frac{EBITDA}{Total\ Debt\ Service} = \frac{10,000,000}{6,000,000} = 1.67 $$

With a DSCR of 1.67, the company comfortably meets its covenant requirement, showcasing its ability to service its debt with its operational earnings.

EBITDA plays a pivotal role in debt agreements by providing a standardized measure of operational profitability that creditors and borrowers can use to set and comply with financial covenants. Its importance cannot be overstated, as it directly impacts the terms of debt and the financial flexibility of a company.

3. The Relationship Between EBITDA and Debt Covenant Compliance

understanding the relationship between ebitda (Earnings Before Interest, Taxes, Depreciation, and Amortization) and debt covenant compliance is crucial for businesses that rely on debt financing. EBITDA serves as a proxy for a company's operating cash flow and is often used by lenders to assess a borrower's ability to generate sufficient cash to cover its debt obligations. Debt covenants, on the other hand, are conditions set by lenders that the borrower must adhere to as part of the loan agreement. These covenants are designed to protect the lender by ensuring that the borrower maintains certain financial ratios and thresholds, which often include EBITDA-related metrics.

From the perspective of lenders, EBITDA is a key indicator of a company's financial health and its capacity to service debt. Lenders may require a minimum EBITDA level or an EBITDA-to-interest coverage ratio to ensure that the company can comfortably pay interest expenses. For borrowers, maintaining compliance with these covenants is essential to avoid defaulting on their loans, which could lead to penalties or even acceleration of the debt.

Here are some in-depth insights into how EBITDA interacts with debt covenants:

1. EBITDA-to-Interest coverage ratio: This ratio measures a company's ability to pay interest on its outstanding debt. A higher ratio suggests that the company is generating ample earnings to cover its interest expenses multiple times over. For example, if a company has an EBITDA of $10 million and annual interest expenses of $2 million, its EBITDA-to-interest coverage ratio would be 5x.

2. fixed Charge Coverage ratio: This ratio expands on the concept of interest coverage by including other fixed charges a company must pay, such as lease payments. It is calculated by adding EBITDA to lease expenses and then dividing by total interest and lease expenses. A company with high fixed charges needs a robust EBITDA to remain compliant with its debt covenants.

3. debt-to-EBITDA ratio: This leverage ratio indicates how many years it would take for a company to pay back its debt if EBITDA is used solely for debt repayment. A lower ratio means the company can pay off its debt quicker, which is favorable for both the company and the lender.

4. EBITDA Margin: This metric shows what percentage of a company's revenue is turning into EBITDA, which can be indicative of operating efficiency. A stable or improving EBITDA margin is often a covenant requirement, as it suggests that the company is managing its operations effectively.

5. Covenant Headroom: This term refers to the buffer a company has before breaching a covenant. For instance, if a debt covenant stipulates that the debt-to-EBITDA ratio must not exceed 4x, and the company's ratio is currently at 3x, it has a covenant headroom of 1x.

Examples to highlight these concepts can be drawn from various industries. For instance, a manufacturing company with significant depreciation expenses might report a lower net income but have a healthy EBITDA, which reassures lenders of its cash flow stability. Conversely, a tech startup with minimal physical assets might have a high EBITDA margin, reflecting its scalability and potential for growth, which could be attractive to lenders despite its shorter track record.

EBITDA is a pivotal metric in the context of debt covenant compliance. It provides a snapshot of a company's operational profitability and cash flow generation capability, which are critical factors for lenders when monitoring the financial covenants of a loan. By understanding and managing their EBITDA levels, companies can navigate the complexities of debt covenants and maintain good standing with their creditors.

4. Common Types of Debt Covenants Linked to EBITDA

Debt covenants are essential tools used by lenders to protect their loaned capital. They are particularly important in the context of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is a key indicator of a company's operating performance and ability to generate cash flow to service debt. EBITDA-linked debt covenants come in various forms, each designed to ensure that the borrowing company maintains a certain level of financial health and is able to meet its debt obligations. These covenants are negotiated and set during the loan agreement process and can have significant implications for the borrower's financial strategy and operations.

From the perspective of lenders, EBITDA-linked covenants provide a buffer against the borrower's potential downturns by setting performance thresholds. On the other hand, borrowers must carefully manage their operations and financial strategies to comply with these covenants, as breaching them can lead to penalties or even loan defaults. Here are some common types of debt covenants linked to EBITDA:

1. Debt to EBITDA Ratio: This covenant sets a maximum limit on the amount of debt a company can carry in relation to its EBITDA. For example, a debt to EBITDA ratio of 4:1 means the company cannot have more than four times its EBITDA in debt. This ratio helps ensure that the company isn't over-leveraged.

2. Interest Coverage Ratio (ICR): The ICR covenant requires that a company's EBITDA be a certain multiple of its interest expenses. A typical ICR might require that the company's EBITDA be at least twice its interest payments, ensuring that the company can comfortably cover its interest obligations from its operating earnings.

3. Fixed charge Coverage ratio: This ratio is similar to the ICR but includes other fixed charges beyond interest, such as lease payments. It measures a company's ability to cover all its fixed charges with its EBITDA.

4. EBITDA Margins: Some covenants require that a company maintain a minimum EBITDA margin, which is EBITDA as a percentage of revenue. This ensures that the company remains profitable and doesn't erode its earnings through increased costs or decreased sales.

5. capital Expenditure limits: While not directly tied to EBITDA, this covenant limits the amount a company can spend on capital expenditures, which can affect EBITDA. It ensures that the company does not overspend and risk its ability to service debt.

6. Minimum EBITDA: A covenant may require that a company maintain a minimum level of EBITDA, which can be an absolute amount or a growth rate over time. This ensures that the company continues to grow its earnings and cash flow.

For instance, consider a company that has agreed to a debt covenant requiring it to maintain a debt to EBITDA ratio of no more than 3:1. If the company's EBITDA decreases due to market conditions or operational issues, it may need to take action such as reducing debt or improving operational efficiency to remain in compliance with the covenant. Failure to do so could result in the lender imposing penalties or demanding immediate repayment of the loan.

EBITDA-linked debt covenants are a critical component of loan agreements, providing a framework within which borrowers must operate to ensure they can meet their debt obligations. Both lenders and borrowers must understand and carefully consider these covenants, as they can significantly impact the borrower's financial flexibility and strategic decision-making.

5. A Step-by-Step Guide

Understanding the calculation of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is crucial for both creditors and investors as it provides a clear picture of a company's operational profitability without the distortion of accounting decisions and tax environments. This metric is particularly significant when navigating debt covenants, as it is often used as a key indicator of a company's ability to generate cash flow to service its debt. From the perspective of a creditor, EBITDA offers a lens through which the financial health and compliance of a borrower can be assessed. For investors, it serves as a tool to compare profitability across companies and industries where capital structures and taxation might differ significantly.

Here's a step-by-step guide to calculating EBITDA with insights from different perspectives:

1. start with Net income: The foundation of EBITDA calculation begins with the net income, which is the bottom line of the income statement. It represents the company's earnings after all expenses, including taxes and interest, have been deducted.

2. Add Back Interest: Since EBITDA aims to measure operational performance, interest expenses are added back to net income. This adjustment is crucial from an investor's standpoint as it removes the effects of financial leverage, allowing for a better comparison of companies regardless of how much debt they have.

3. Add Back Taxes: Taxes are added back for similar reasons as interest. This step neutralizes the impact of the company's tax strategy and jurisdictional tax rates, providing a more standardized view of operating earnings.

4. Add Back Depreciation: depreciation is a non-cash expense that accounts for the gradual loss of value of physical assets over time. Adding back depreciation is important because it allows for the assessment of cash flows generated from operations, which is a key concern for creditors monitoring debt covenants.

5. Add Back Amortization: Like depreciation, amortization is a non-cash expense that reflects the consumption of intangible assets. Including amortization in the EBITDA calculation ensures that earnings are not understated due to the systematic write-off of intangibles like patents or goodwill.

Example: Let's consider a hypothetical company, XYZ Corp, which has reported a net income of $2 million. The company's financials also show interest expenses of $500,000, tax expenses of $300,000, depreciation of $200,000, and amortization of $100,000. To calculate XYZ Corp's EBITDA, we would add all these figures back to the net income:

\begin{align*}

EBITDA &= \text{Net Income} + \text{Interest} + \text{Taxes} + \text{Depreciation} + \text{Amortization} \\

&= \$2,000,000 + \$500,000 + \$300,000 + \$200,000 + \$100,000 \\ &= \$3,100,000

\end{align*}

This figure of $3.1 million represents XYZ Corp's EBITDA, providing a clearer view of the company's operational profitability and its ability to cover its debt obligations. By understanding and calculating EBITDA, stakeholders can make more informed decisions regarding the financial stability and performance of a business.

6. Strategies for Improving EBITDA to Meet Covenant Thresholds

Improving EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a critical strategy for companies looking to meet or exceed the thresholds set by debt covenants. This financial metric is often used by lenders to assess a company's ability to generate cash flow and service its debt. As such, a strong EBITDA can provide more favorable borrowing terms and headroom within covenant restrictions. From the perspective of a CFO, enhancing EBITDA involves a combination of cost management, revenue optimization, and operational efficiency. Meanwhile, an investor may view EBITDA improvements as a sign of a company's growth potential and financial health. For a company on the brink of breaching its covenants, a robust plan to boost EBITDA can be the difference between renegotiating terms and facing costly penalties or technical default.

Here are some in-depth strategies to improve EBITDA:

1. Cost Reduction: Implementing cost control measures can directly impact EBITDA. This could involve renegotiating supplier contracts, reducing overhead costs, or streamlining operations to eliminate waste. For example, a manufacturing firm might adopt lean manufacturing techniques to reduce production costs, thereby improving its EBITDA margin.

2. Revenue Enhancement: Increasing top-line revenue can also improve EBITDA. This might include expanding into new markets, adjusting pricing strategies, or enhancing product offerings. A tech company, for instance, could launch a premium version of its software to existing customers, driving additional revenue without significantly increasing costs.

3. Operational Efficiency: Improving operational processes can lead to cost savings and better margins. This could be achieved through better inventory management, optimizing the supply chain, or investing in technology that increases productivity. A retailer could use just-in-time inventory systems to reduce holding costs, positively affecting EBITDA.

4. Portfolio Optimization: Companies can look at divesting non-core or underperforming assets to improve their EBITDA. This not only provides a one-time boost to earnings but also allows the company to focus on more profitable areas. An example is a conglomerate selling off a loss-making division to concentrate on its core business segments.

5. Strategic Acquisitions: Acquiring companies or assets that can immediately contribute to EBITDA is another approach. This requires careful due diligence to ensure the acquisition is accretive rather than dilutive to earnings. A classic case is a company acquiring a competitor with complementary products and substantial cost synergies.

6. Tax Optimization: While ebitda is pre-tax, optimizing the tax burden can free up cash that can be reinvested into the business to drive EBITDA growth. This might involve tax planning strategies or restructuring business units in a tax-efficient manner. A multinational might shift certain operations to jurisdictions with more favorable tax rates to reduce its overall tax liability.

7. working Capital management: Efficient management of working capital components like inventory, receivables, and payables can improve cash flow, which in turn can be used to bolster EBITDA. A service company could shorten its payment terms for clients to accelerate cash inflows, thus enhancing its EBITDA.

By employing these strategies, companies can not only meet the covenant thresholds but also position themselves for sustainable growth and financial stability. It's important to note that while these strategies can improve EBITDA, they should be executed with a long-term perspective and in alignment with the overall strategic goals of the company.

7. What to Do When EBITDA Falls Short?

When a company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) falls short of the thresholds set by debt covenants, it can trigger a covenant breach, leading to a precarious situation for the company. This is because EBITDA is often used as a measure of a company's operating performance and ability to generate cash flow to service debt. A breach can result in penalties, increased interest rates, or even the acceleration of debt repayment. Navigating this scenario requires a proactive and strategic approach, balancing the interests of the company, its creditors, and other stakeholders.

From the Company's Perspective:

1. Assess the Situation: The first step is to conduct a thorough analysis of the financials to understand the severity of the breach and its underlying causes.

2. Communicate with Creditors: Open lines of communication with lenders are crucial. Informing them about the breach and presenting a clear plan for remediation can build trust and potentially lead to waiver agreements or amendments to covenants.

3. Explore Remediation Strategies: This might include cost-cutting measures, asset sales, or renegotiating terms with suppliers to improve cash flow.

4. Consider Equity Infusion: In some cases, bringing in new equity to shore up the balance sheet can be a viable option.

From the Lender's Perspective:

1. Evaluate the Breach Impact: Lenders will assess the risk associated with the breach and the likelihood of the company's recovery.

2. Negotiate Remedies: They may propose amendments to the covenants, adjust interest rates, or require additional collateral.

3. Monitor Progress: Lenders will closely monitor the company's financial health and adherence to any new terms agreed upon.

From an Investor's Perspective:

1. Risk Assessment: Investors will re-evaluate their investment in light of the breach, considering the potential impact on the company's value.

2. Engage in Dialogue: They may seek engagement with management to understand the steps being taken to address the breach and restore compliance.

Example: Consider a manufacturing company that has experienced a significant drop in EBITDA due to a downturn in the market. The company's debt covenants stipulate that the EBITDA-to-interest coverage ratio must not fall below 3:1. However, the recent decline has pushed the ratio to 2.5:1, breaching the covenant. The company proactively approaches its creditors, explaining the situation and outlining a plan to reduce costs and divest non-core assets. The creditors, appreciating the transparency and clear plan, agree to a temporary waiver of the covenant breach, allowing the company time to execute its turnaround strategy.

Navigating covenant breaches is a multifaceted challenge that requires a comprehensive understanding of financial metrics, clear communication, and a collaborative approach among all parties involved. By taking proactive steps and considering the perspectives of different stakeholders, companies can effectively manage covenant breaches and work towards financial stability.

8. Successful Management of Debt Covenants Using EBITDA

The management of debt covenants is a critical aspect of financial strategy for many businesses, particularly when navigating through periods of financial uncertainty or pursuing aggressive growth strategies. EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, serves as a key metric in this process, offering a clearer picture of a company's operational profitability and cash flow generation capabilities. By focusing on EBITDA, companies can effectively manage and sometimes even renegotiate the terms of their debt covenants, ensuring they remain in good standing with creditors and maintain access to necessary capital.

From the perspective of a financial analyst, the use of EBITDA allows for a standardized comparison across companies and industries by eliminating the effects of financing and accounting decisions. This is particularly useful in covenant management as it provides a consistent benchmark for debt servicing capabilities.

Corporate treasurers, on the other hand, may view EBITDA as a tool for liquidity management. By monitoring EBITDA, they can anticipate potential covenant breaches and take proactive measures such as cost-cutting or asset sales to improve the metric.

Creditors use EBITDA to assess the risk of lending and to set appropriate covenant thresholds. A company consistently delivering strong EBITDA figures is often seen as a lower credit risk, which can lead to more favorable borrowing terms.

Here are some in-depth insights into how EBITDA can be utilized for managing debt covenants:

1. Covenant Headroom Analysis: Companies often perform regular headroom analysis to ensure they stay within the agreed-upon EBITDA ratios. For example, a business might need to maintain a debt-to-EBITDA ratio of less than 4x. By closely monitoring this ratio, the company can take timely action if they approach the covenant limit.

2. EBITDA Adjustments: Sometimes, companies can negotiate with lenders to make certain adjustments to the EBITDA calculation, such as excluding one-time expenses or non-operational losses. This can provide more leeway in covenant compliance.

3. Covenant Waivers and Amendments: In cases where a breach is unavoidable, companies can engage in discussions with creditors to obtain waivers or amend the covenants. Demonstrating a strong underlying EBITDA performance can be persuasive in these negotiations.

4. strategic Financial planning: By understanding the impact of different operational decisions on EBITDA, companies can plan their activities in a way that optimizes their covenant compliance. This might include timing of asset purchases or structuring of deals to enhance EBITDA.

To illustrate, consider the case of a retail company that faced a potential breach of its interest coverage ratio covenant. By implementing cost-saving measures and optimizing inventory turnover, the company improved its EBITDA margin, thus avoiding the covenant breach and even securing better terms for future financing.

In another example, a manufacturing firm was able to successfully negotiate a temporary covenant waiver by presenting a robust turnaround plan focused on EBITDA growth through market expansion and operational efficiencies.

Through these case studies, it becomes evident that EBITDA is not just a financial metric but a strategic tool that, when managed effectively, can provide companies with the flexibility and stability needed to navigate the complex landscape of debt covenants. The key lies in continuous monitoring, transparent communication with creditors, and the agility to adapt financial strategies as needed.

9. Best Practices for Debt Covenant Management with EBITDA Metrics

Managing debt covenants effectively is crucial for the financial health and operational flexibility of a company. EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a widely used metric in debt covenant agreements due to its ability to approximate cash flow and measure a company's operational efficiency without the distortion of accounting and financial deductions. As we conclude our exploration of debt covenants and the pivotal role of EBITDA metrics, it's important to consolidate the best practices that can help companies navigate these agreements with confidence and foresight.

From the perspective of financial analysts, maintaining a strong EBITDA is essential for covenant compliance. They emphasize the importance of regular monitoring and forecasting to anticipate potential breaches. Legal advisors, on the other hand, stress the need for clear definitions and terms within the covenant agreements to avoid ambiguity that could lead to unintentional breaches. Company executives advocate for proactive communication with lenders, especially when a breach is anticipated, to renegotiate terms or secure waivers.

Here are some in-depth best practices for managing debt covenants with EBITDA metrics:

1. regular Financial reviews: Conduct quarterly reviews of financial statements to ensure that EBITDA levels are in line with covenant requirements. This allows for early detection of trends that could lead to a breach.

2. EBITDA Improvement Plans: Develop strategic plans to improve EBITDA, such as cost reduction initiatives or revenue enhancement programs. For example, a company might renegotiate supplier contracts or optimize its product mix to boost profitability.

3. Covenant Headroom Analysis: Calculate the 'headroom' or cushion between the current EBITDA and the covenant threshold. A healthy headroom indicates a lower risk of breach. For instance, if a covenant requires an EBITDA-to-debt ratio of no less than 2:1, and the company's current ratio is 3:1, it has a headroom of 1.

4. Scenario Planning: Engage in scenario planning to understand the impact of various business decisions on EBITDA. This could involve stress-testing the financial model against different market conditions.

5. Transparent Communication: Maintain open lines of communication with lenders, providing regular updates on the company's financial performance and any factors that may affect EBITDA.

6. Covenant Compliance Team: Establish a dedicated team responsible for tracking covenant compliance, which includes members from finance, legal, and operations.

7. Training and Awareness: Ensure that key personnel across the organization understand the implications of debt covenants and the importance of EBITDA in maintaining compliance.

8. Negotiation of Terms: When entering into a new debt agreement, negotiate covenants that are realistic and aligned with the company's financial projections and business cycle.

To illustrate, consider a manufacturing company that has a debt covenant stipulating a minimum EBITDA margin of 15%. If the company anticipates a downturn in sales, it might proactively cut costs or diversify its product offerings to maintain its EBITDA margin above the covenant requirement.

Effective debt covenant management with EBITDA metrics requires a multifaceted approach that combines rigorous financial discipline, strategic planning, and transparent stakeholder communication. By adhering to these best practices, companies can ensure they remain in good standing with their lenders and avoid the restrictive consequences of covenant breaches.