A Practitioner’s Guide to Covenants, Baskets, EBITDA Add-Backs and What the Lender Can Actually Do
Julian R. Sterling
Five Excel workbooks. Every figure the book prints is reproduced by a live formula in the first
four, and each of them ends with a checks sheet listing the book’s figure beside what the
workbook computes. The fifth is a working document: the checklist of Appendix A, with room to
answer it. They are free. Nothing is gated behind a sign-up, and no email address is
asked for.
Everything described below is inside it, with the read-me.
Chapters 4 to 12 · the whole facility
Kestrel: the complete facility, twenty-eight quarters
A seven-year unitranche built from one sheet of assumptions. The covenant tests, the
margin ratchet, the cash sweep and the headroom all follow from the inputs; nothing is typed
twice, so changing one number moves everything that depends on it and nothing that does not.
Go to sheet 4 and read the headroom column. Then go back to Assumptions and set the
add-back cap to 100 per cent. Quarters 9 to 11 come back into compliance
— and nothing about the business changed. That is the argument of the book in
one keystroke.
Headroom is shown in EBITDA rather than in turns, deliberately. “0.21 turns of
headroom” means nothing to anybody; €0.8 million of EBITDA means the
company is one bad month from a default, and that is the same fact stated so a credit
committee can act on it.
Kestrel_The_Complete_Facility.xlsx · XLSX · 20 KB
Chapters 5 and 6
Where the default actually comes from
The definition of Consolidated EBITDA, quarter by quarter: what is claimed, what the cap
allows, and what survives. On the base case the add-back is the only thing passing the
test in quarters 7 and 8 — 5.97× and 6.65× unadjusted against a
5.75× covenant — and the 20 per cent cap disallows €0.32 million
in quarter 8 alone.
Then the run-off. The add-back is a two-year concession and the covenant steps down at
quarter 9. Both happen in the same quarter, which is why the breach lands where it does.
Change either date and watch the default move: it is a drafting outcome, not a trading
one, and the two dates were agreed by different people on different days.
Headroom_and_the_Add_Back.xlsx · XLSX · 12 KB
Chapter 11
The remedy, and what it costs
The same quarter cured two ways. As deemed EBITDA the sponsor writes
€3.59 million; as a prepayment it writes
€19.74 million — 5.5 times as much for identical covenant
compliance, because a prepayment has to move net debt rather than the numerator.
The cap sheet then does the arithmetic nobody does at signing: three breach quarters against
a two-in-four cure limit. The third one cannot be cured whatever the sponsor is willing
to fund — which means the negotiated cure right does not cover the case it was
negotiated for. That is worth knowing on the day the term sheet is signed rather than on the day
the third breach arrives.
The_Equity_Cure.xlsx · XLSX · 12 KB
Chapters 7 to 9
The capacity nobody adds up
Fixed baskets, grower baskets, the incremental facility, the free-and-clear amount, the
ratio tranche — and the reclassification that lets one use count twice. Set the EBITDA
growth rate and watch total permitted capacity grow with it, which is the feature of a grower
basket that reads as innocuous in the definitions and is not.
The MFN sheet prices the sunset: what the protection is worth while it runs, and what happens
the day after it expires. A lender that has not put a number on that day has priced only half of
what it agreed to.
Baskets_Incremental_and_MFN.xlsx · XLSX · 12 KB
Appendix A · the working document
The sixty-four-point review checklist, live
The sixty-four questions of Appendix A as a sheet you can work in: the same questions,
in the same order, generated from the same source file as the chapter, so the book and the
workbook cannot drift apart.
There are columns for the answer, the source document, the owner and the
date. The status column is computed, and it marks any question answered without a source as
“unsourced” — because an answer whose authority is
“the borrower says” is not an answer. The Progress sheet counts only the sourced
ones, in total and by section.
Work top to bottom on a first read. On a re-read start with Definitions and Financial
covenants: they are what the arithmetic of the book turns on, and they are the two sections you
can answer from the document alone.
The_Review_Checklist.xlsx · XLSX · 12 KB
The finding, in one line
The default in this facility is not produced by trading. It is produced by
two dates in the definitions — the expiry of a two-year add-back
concession and a covenant step-down — landing in the same quarter. Move either one and the
breach disappears without a euro of EBITDA changing. That is why the workbook makes both dates
inputs, and why the run-off sheet exists at all.
Why the cure right is narrower than it reads
A cure right is negotiated because the sponsor expects a bad patch, and a bad patch is rarely one
quarter long. Against a two-in-four limit, three consecutive breach quarters leave the third
uncurable — not expensive, uncurable. The limit is usually the least-discussed line
in the section, and it is the one that decides whether the right is worth anything in the case it
was bought for.
The two forms of cure are also not interchangeable at any price. Deemed EBITDA and prepayment
produce the same covenant outcome for
€3.59 million against €19.74 million. Which form the
agreement permits is therefore worth about sixteen million euros in this single quarter, and it is
settled by one clause.
Conventions used throughout
Blue on a pale fill
an input — you may edit these
Black text
a formula — do not overtype these
Yellow fill
the assumptions that carry the answer
Checks sheet
fifty-six figures, each beside the figure the book prints (the four model workbooks)
Amounts are in millions of euros, and Kestrel Industrial is fictional and deliberately simple:
it exists to show a mechanism, not to represent a company. Fifty-six figures are tested
across the four model workbooks. Fifty-five reproduce exactly, and one differs in the third
decimal — the quarter 10 deemed-EBITDA cure, which the book prints as
€2.46 million and the workbook computes as 2.4545. It is marked
“rounding” rather than quietly folded into “reproduced”, because a check
that widens its own tolerance until everything passes is not a check.
Opening the files
The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. They use
no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks
to update links on opening, decline — there are none.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.