Two-minute summary
Loan agreements often require borrowers to remain below a leverage threshold and above an interest-cover threshold. This tool compares two specified contractual ratios with editable limits, shows available borrowing headroom, and stresses EBITDA, financing cost and net debt. It deliberately does not decide contractual default: covenant terms vary in their definition, timing, cure rights and reporting requirements.
Calculation methodology and assumptions
Net debt equals interest-bearing debt minus cash that qualifies for covenant netting. Modelled leverage is net debt divided by covenant EBITDA, and interest coverage is EBITDA divided by eligible interest expense. Leverage passes when the modelled multiple is at or below its maximum. Interest coverage passes when it is at or above its minimum. Net debt headroom equals maximum permitted leverage × EBITDA minus net debt. Minimum EBITDA is the larger of net debt divided by leverage limit, minimum interest cover × interest, and zero. The stress reduces EBITDA by the entered percentage, increases net debt by the entered amount and increases interest by its specified percentage.
Detailed worked example
Assume ₹12 crore gross debt, ₹2 crore eligible cash, ₹4 crore covenant EBITDA and ₹1 crore interest. Net debt is ₹10 crore. Leverage is 2.50× versus a 3.00× maximum, and interest cover is 4.00× versus a 3.00× minimum. Maximum net debt is ₹12 crore, leaving ₹2 crore debt headroom. Minimum EBITDA required for both conditions is approximately ₹3.333 crore; headroom is about ₹66.67 lakh. In the illustration, EBITDA falls 20% to ₹3.20 crore, net debt rises to ₹11 crore and interest becomes ₹1.15 crore. Stress leverage rises to 3.4375× and coverage falls to roughly 2.7826×: both fail the chosen numeric thresholds.
Covenant-defined EBITDA is essential
Adjusted EBITDA can include permitted add-backs, acquisition adjustments, one-off costs, lease treatment and trailing-twelve-month conventions. Enter the amount calculated strictly under the finance agreement; substituting a company presentation EBITDA can produce a materially wrong answer. The tool does not select add-backs or certify calculations.
What cash can be netted?
Lenders may limit netting to freely available, unrestricted cash, with monetary caps or restrictions on overseas cash and subsidiaries. Do not subtract all bank balances automatically. Restricted deposits, margin money and escrow cash can be excluded even if shown as assets in financial statements.
Interest expense definitions
Certain covenants include or exclude capitalised interest, lease interest, fees, imputed interest and cash interest on floating-rate debt. The tool uses the exact interest input supplied. If interest is zero, the interest-cover ratio is reported as not applicable, not mechanically passed; examine the contract separately.
Negative net debt and ratio sign
If qualifying cash exceeds financial debt, net debt is negative and the displayed ratio can be negative. The tool preserves that arithmetic rather than forcing zero. Some agreements expressly floor net debt at zero; if so, adjust your input calculation according to the actual definition before using this model.
Stress is not probability
A 20% EBITDA fall and an additional ₹1 crore net-debt increase are deterministic what-if cases, not forecasts or default probabilities. They help locate vulnerability near the contractual thresholds. For floating-rate debt, consider whether the interest-cost sensitivity should reflect only repricing balances and relevant periods instead of multiplying total interest uniformly.
What numerical compliance misses
A financial agreement can contain debt-service ratios, liquidity tests, minimum tangible net worth, capex limits, security-coverage obligations, restricted payment clauses, cross-defaults and event triggers. Tests may apply quarterly, annually or on an incurrence basis. Legal cure periods, waivers, baskets and certificates are outside this calculator. Professional review is essential before a compliance representation to lenders.
Frequently asked questions
Does within-limit status mean the loan is covenant-compliant?
No. Only the two entered numerical tests are compared, and actual contractual definitions and test dates must be independently verified.
What happens if EBITDA falls to zero in stress?
The stressed leverage is undefined and the result is treated as outside the modelled leverage condition.
Why does no interest show not applicable?
Dividing EBITDA by zero would not represent a meaningful contractual interest-cover test. The agreement must govern its treatment.
Official sources and further reading
Sources explain the calculation conventions and rules referred to above. Notifications and standards change; confirm on the official site before you file, book or advise.
Educational working tool. Results follow the scope and assumptions described on this page and the figures you enter; they are not accounting, audit, tax, legal, investment or financing advice. Treatment depends on facts, contracts and the law or standard in force for the relevant period, so reconcile to your records and consult a qualified professional before you rely on a result.