Covenant compliance certificate review: a checklist for lenders
How to review a quarterly compliance certificate against the credit agreement: definitions, add-back caps, step-downs, cures and the evidence to keep.
Key takeaways
- The certificate is the borrower's calculation. The credit agreement's definitions decide whether it is right.
- Most errors sit in the Consolidated EBITDA add-backs and their caps, and in which covenant level applies this quarter.
- Recompute each ratio from inputs you can trace to the financial statements.
- Check the amendments. The latest one may have changed a definition or a test level.
Every quarter, borrowers deliver a compliance certificate showing that they meet their financial covenants. For a lender or a private credit fund, reviewing it is routine work, and it is also where a breach can be missed if the calculation follows the borrower's preferred definitions rather than the agreement's.
What a compliance certificate shows
A compliance certificate is signed by an officer of the borrower and delivered with the quarterly or annual financial statements. It usually contains:
- the calculation of each financial covenant, such as total or net leverage and interest or fixed charge coverage;
- a reconciliation from reported earnings to Consolidated EBITDA, with each add-back;
- confirmation that no default or event of default has occurred, or a description of one that has.
The certificate is a summary of the borrower's work. The review is about whether that work matches the credit agreement.
The review checklist
- Use the right version of the agreement. Collect the credit agreement and every amendment and waiver. Later documents override earlier ones.
- Confirm the test period and the covenant level. Many agreements step covenant levels down over time. Find the level that applies to this quarter in the table, not last year's.
- Read the definitions. Consolidated EBITDA, Consolidated Total Debt, and any cash netting are defined terms. Check what is included, excluded and capped.
- Test each add-back. Is the category permitted? Is it subject to a cap, usually a percentage of EBITDA? Is the cap applied to the right base?
- Check pro forma adjustments. Acquisitions and disposals during the period often require pro forma treatment, with their own conditions.
- Tie the inputs to the financial statements. Net income, interest, taxes, depreciation and debt balances should match the delivered statements.
- Recompute the ratio. Use the agreement's definitions and your tied inputs, and compare with the certificate.
- Check any equity cure. Cure rights usually limit how often they can be used and how the cure amount counts, and set a deadline for the contribution.
- Confirm delivery timing. The agreement sets deadlines for financial statements and certificates. A late certificate can be a default in its own right.
Where certificates usually go wrong
- Add-back caps applied to an inflated base. A cap of, say, 15% of EBITDA means something different if EBITDA already includes the add-backs, or an equity cure.
- The old covenant level. A step-down that took effect this quarter is easy to miss.
- Uncapped cash netting. Many agreements limit how much cash can be netted against debt.
- Definitions that changed in an amendment. The certificate template may predate the amendment.
- Inputs that do not match the statements. A rounding difference is one thing; a different interest figure is another.
The evidence your file should keep
For each line of the certificate, a defensible review records the clause that governs it, the page of the financial statements each input came from, the recalculation, and the reviewer's conclusion with a date. When a credit committee or auditor asks how a breach was ruled out, that record is the answer.
Running the review with CiteLLM
Attach the credit agreement, its amendments, the certificate and the financial statements, up to 20 PDFs in one review, and ask your AI assistant to check each line of the certificate against the agreement. With CiteLLM in ChatGPT or Claude, every conclusion opens at the clause and statement line it relies on.
- Recalculated ratios are marked calculated, with the formula and each input highlighted in its source document.
- A line that conflicts with the agreement is marked contradicted, with the governing clause on screen.
- The evidence report, with your decision on each line, goes straight into the credit file.
The assessment of each line comes from the AI assistant. CiteLLM confirms where every quoted clause and figure appears, and the reviewer makes the call.
Frequently asked questions
How often are compliance certificates delivered?
Usually with each set of quarterly and annual financial statements. The credit agreement sets the exact deadlines, often a number of days after the end of each quarter and fiscal year.
What is an equity cure?
A right, common in sponsor-backed deals, to fix a covenant breach with a new equity contribution that is treated as EBITDA for the test. Agreements typically limit how many times it can be used.
What if the certificate and the agreement disagree?
The agreement governs. Flag the difference, quote the clause, and ask the borrower for a corrected certificate.