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Covenant Headroom Calculator: Leverage, Coverage and Liquidity Cushion
Financial covenants fail quietly. A leverage or coverage test can pass this quarter with almost no room, then break when EBITDA dips or debt rises. Headroom tells you how far you are from the line, which is what lenders, owners and boards actually want to know.
Enter LTM EBITDA, debt, cash, interest and other fixed charges, then your covenant thresholds. You get headroom on each test, the EBITDA cushion in dollars and percent before breach, and the tightest covenant. The example values are illustrative; replace them with yours and your agreement’s definitions.
Position
Covenant thresholds
Your results
EBITDA cushion before breach (tightest: leverage)
$1,250,000 / 12.5%
EBITDA can fall by this much, with debt and charges unchanged, before the tightest EBITDA-based covenant is breached.
Leverage (net debt / EBITDA): 3.50x vs max 4.00x
Compliant. Headroom 0.50x. EBITDA cushion $1,250,000 (12.5%). Extra debt capacity $5,000,000.
Fixed charge coverage: 2.00x vs min 1.25x
Compliant. Headroom 0.75x. EBITDA cushion $3,750,000 (37.5%).
Liquidity: $10,000,000 vs min $7,500,000
Compliant. Headroom $2,500,000. A drop in EBITDA reaches liquidity through cash burn, not a fixed formula, so no EBITDA cushion is shown.
This is a simplified estimate. Credit agreements define EBITDA, debt, cash netting caps, fixed charges and test dates in their own terms. Follow the definitions in your actual agreement and confirm with your lender or counsel.
Free template · Excel workbook
Covenant Headroom and Forward Test Tracker
Test leverage, fixed charge coverage and minimum liquidity today and forward, with EBITDA cushion in dollars and percent.
Illustrative example values are prefilled; replace them with your own. Everything is calculated in your browser, and Performis does not store what you enter. Our analytics record which calculator was used and a few summary figures, such as a rounded result.
The formulas
- Leverage
- Debt ÷ EBITDA (net debt = debt − cash, if netting is on)
- Leverage headroom
- Maximum leverage − actual leverage
- EBITDA cushion (leverage)
- EBITDA − (debt ÷ maximum leverage); percent = cushion ÷ EBITDA
- Fixed charge coverage
- EBITDA ÷ (interest + other fixed charges)
- EBITDA cushion (coverage)
- EBITDA − (minimum coverage × fixed charges)
- Liquidity headroom
- (cash + undrawn availability) − minimum liquidity
- Debt capacity at the leverage limit
- (maximum leverage × EBITDA) − debt
How to interpret your result
The tightest covenant is the one that matters
Compare the EBITDA cushion on each test. The smallest cushion is where a miss shows up first, so that is where to focus forecasting.
Percent cushion is easier to stress
If EBITDA is volatile month to month, ask how a cushion of this size compares with the swings you have actually seen. Use your own history, not an outside rule of thumb.
Net leverage can flatter
Cash that counts today may be spent, or capped by the agreement, by the next test date. Switch netting off to see the gross position.
Check upcoming test dates
Headroom is a snapshot. Run it on your forecast for each future test date, including seasonality and planned borrowing.
Definitions decide the answer
Add-backs, permitted adjustments, cash netting caps and fixed charge terms vary by agreement. Use this to find where to look, and recalculate with the actual definitions before relying on it.
Frequently asked questions
What is covenant headroom?
The gap between where a financial covenant is tested today and the level at which it would be breached. It is expressed in turns of leverage or coverage, and as the amount EBITDA could fall before the test fails.
How do you calculate EBITDA cushion for a leverage covenant?
Required EBITDA is debt divided by the maximum leverage. Cushion is actual EBITDA minus required EBITDA, in dollars and as a percent of actual EBITDA. It assumes debt does not change.
How is fixed charge coverage calculated here?
EBITDA divided by fixed charges, where fixed charges are interest plus the other fixed charges you enter, such as scheduled principal and leases. Real definitions often deduct capex or cash taxes from EBITDA first. Use your agreement’s formula.
What is the difference between net and total leverage?
Total leverage uses gross debt. Net leverage subtracts cash first. Many agreements cap how much cash can be netted, so check yours before relying on the net figure.
Why is there no EBITDA cushion for liquidity?
Liquidity is cash plus available borrowing. It falls through cash burn over time, not through a fixed formula with EBITDA, so the tool shows the dollar headroom against the minimum instead.
Is this the same as my compliance certificate?
No. It is a simplified estimate. Credit agreements define EBITDA add-backs, debt, cash netting, fixed charges and test dates in their own terms. Follow the definitions in your actual agreement and confirm with your lender or counsel.
Is my data stored or sent anywhere?
No. All calculations run in your browser and nothing you enter is collected or saved.
Take it further with a template
Free template · Excel workbook
Covenant Headroom and Forward Test Tracker
Test leverage, fixed charge coverage and minimum liquidity today and forward, with EBITDA cushion in dollars and percent.
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