Explain how covenants create early-warning control points for debt management.
Passing is not the same as comfortable. Covenants convert business performance into financing consequences Debt agreements often include promises about leverage, coverage, liquidity, payments, reporting, or asset sales. These promises define when lenders receive additional rights or protections. Headroom is the operating signal A covenant can pass and still be risky if headroom is shrinking. The useful question is: how much movement would cause a breach, and what can management do before that happens? Definitions beat approximations Covenant calculations depend on agreement language. Add-backs, exclusions, baskets, test dates, and cure rights can change the answer. Always manage from the agreement…
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