Covenant breach cure case study

Debt Covenant Breach & Cure Case Study

A $120M company breached its fixed-charge coverage ratio covenant, triggering lender remediation demands. Twelve weeks later — working capital optimization, AR collection acceleration, weekly availability reporting automation — the covenant was cured and lender confidence restored.

Client profile: Composite case study based on a $120M revenue services company with $30M revolving credit facility (FCC ratio + minimum EBITDA covenants), tested quarterly. Covenant breached due to AR collection deterioration + temporary EBITDA dip; lender threatened amendment / forbearance fee.
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Company contextBefore — what was actually brokenWhat Ledger Summit implementedCovenant cure mechanicsImplementation timelineMeasured results

Company context

The client is a $120M revenue services company with a $30M revolving credit facility. Quarterly covenants: Fixed-Charge Coverage (FCC) ratio ≥ 1.10x and Minimum EBITDA $14M trailing 12 months. Q3 calculation showed FCC at 0.96x and EBITDA at $13.4M. The breach was driven by: AR collection deterioration (DSO ballooned from 42 to 58 days), one large customer payment delay, and temporary EBITDA dip from a one-time legal expense.

Lender response: notice of default, demand for cure plan within 30 days, threat of forbearance fee + amendment if cure unachievable. Audit committee asked for immediate cure timeline.

  • $120M revenue services company
  • $30M revolving credit facility
  • Quarterly tested: FCC ≥ 1.10x, EBITDA ≥ $14M TTM
  • Q3 actuals: FCC 0.96x, EBITDA $13.4M
  • Breach driven by AR deterioration + one-time EBITDA dip
  • Lender demanded cure plan within 30 days
  • Cure window: 90 days to next quarter test

Before — what was actually broken

  • AR aging deteriorated: DSO 42 → 58 days
  • Largest customer 30 days past due
  • Cash forecast static; no scenario planning
  • Weekly availability calculation manual
  • Covenant calculation done quarterly only
  • No early warning on covenant trajectory
  • Lender communications reactive

What Ledger Summit implemented

  • 13-week rolling cash flow forecast with daily refresh
  • AR collection acceleration program: customer-by-customer outreach for top 50 accounts; payment acceleration negotiation
  • Weekly availability calculation automated and integrated to forecast
  • Working capital optimization: AP payment timing, customer credit terms, intercompany settlement
  • Covenant monthly trajectory: FCC and EBITDA tracked monthly with quarter-end projection
  • Lender weekly pack: cash flow, AR aging, AP aging, covenant projection
  • Customer concentration analysis: top 10 dependency, action items per customer
  • Cost discipline: discretionary spend pause; capex deferral assessment
  • Communication protocol: weekly lender check-in, monthly board update

Covenant cure mechanics

LeverWhat it doesTypical impact
AR collection accelerationReduce DSO; recover cash5–15 days DSO reduction
AP payment timing optimizationPush within termsReduce average AP balance
Discretionary spend pauseSuspend non-essentialImprove EBITDA short term
Customer-by-customer collectionTop 50 accountsTargeted recovery
Working capital releaseAR + inventory + APMulti-million-dollar cash impact
Capex deferral assessmentPush approved capexCash preservation
Customer credit termsTighten on new contractsForward-looking improvement
Lender communicationsProactive, weeklyMaintains relationship; avoids amendment
Covenant projectionMonthly forward-lookingEarly warning of next breach

Implementation timeline

  • Week 1: Cure plan drafted; lender meeting; weekly reporting started
  • Weeks 2–4: 13-week cash forecast deployed; AR acceleration program; daily cash discipline
  • Weeks 5–8: Working capital optimization in motion; weekly lender pack established
  • Weeks 9–11: Customer collections progressing; covenant trajectory improving
  • Week 12: Q4 covenant calc: FCC 1.18x, EBITDA $14.6M — cured

Measured results

MetricBeforeAfterDelta
DSO58 days45 days−13 days
Cash position$3.2M$8.4M+$5.2M
FCC ratio0.96x1.18x+0.22
EBITDA TTM$13.4M$14.6M+$1.2M
Weekly availability calc time4 hrs15 min−94%
Lender forbearance feeThreatenedAvoided—
Amendment feesThreatenedAvoided—

Alternatives considered

OptionTimeCostStrengthsWeaknesses
Hire turnaround consultant (AlixPartners, A&M)12+ weeks$240K–$520KBrand; deep benchCost; reputation impact
Restructure with financial advisor3–6 months$180K–$340KLender-experiencedOften premature for covenant cure
Internal-only—$0No vendorDoesn't scale fast enough
Ledger Summit + interim CFO partner (selected)12 weeks$80K–$140KRight-sized; finance-ledCoordination with lender

When this approach fits

  • Covenant breach (FCC, leverage, minimum EBITDA, debt service coverage)
  • Asset-based lending or revolving credit facility
  • $25M–$300M revenue
  • Existing Sage Intacct, NetSuite, or comparable GL
  • Active lender relationship willing to engage in cure
  • Working capital improvement available (not pure operational underperformance)

Lessons learned

  • Engage lender immediately. Proactive communication beats reactive surprise; weekly cadence saves the relationship.
  • 13-week cash forecast is the lever. Static forecast lets covenant trajectory go unnoticed; rolling forecast catches early.
  • Customer-by-customer collection. Top 50 accounts drive most AR deterioration; targeted outreach works.
  • Don't wait for next test. Monthly trajectory analysis catches the next breach before it happens.
  • Working capital is faster than EBITDA. AR / AP / inventory move in weeks; EBITDA improvement takes quarters.

Frequently asked questions

What's a covenant breach?

Failure to meet financial covenant in credit agreement (FCC ratio, leverage, minimum EBITDA, etc.). Triggers default unless cured or waived.

What does the lender typically do?

Issue notice of default; demand cure plan; potentially negotiate amendment or forbearance with fee.

What's a forbearance agreement?

Lender agrees not to enforce default in exchange for fee + reporting + remediation. Buys time to cure.

How quickly does this need to happen?

Cure plan typically due within 30 days; cure execution within 60–90 days depending on next test date.

Can covenants be re-set?

Sometimes — through amendment with associated fees. Better to cure if possible.

What if cure isn't possible?

Restructuring discussion: amendment with relaxed covenants + fees, or alternative financing.

How does this support PE sponsor?

Cure preserves portfolio value; sponsor diligence-ready posture; avoids amendment fees and lender skepticism.

What about timing — can we delay the test?

Generally no — covenant test dates are fixed in agreement. Some agreements allow self-cure period.

What's the typical cost?

$80K–$240K depending on scope. Plus internal team time. Lender amendment fees and forbearance fees are additional.

Can you help with lender communications?

Yes — weekly pack design, talking points, formal correspondence. Coordinated with internal team.

Covenant test approaching with covenant trajectory unfavorable?

A 30-minute call walks your forecast and covenant calc and tells you what cure looks like.

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