How covenant waivers work — a practical overview
A covenant waiver is a formal, usually written, agreement in which one or more lenders agree not to deem a covenant breach an event of default for a defined period or under defined conditions. In practice, a waiver can be a stand‑alone letter, a side letter, or part of a loan amendment. It preserves the lender‑borrower relationship while giving the borrower time to cure the problem or implement a restructuring plan.
In my 15 years advising business borrowers and lenders, I’ve seen waivers used most effectively when the borrower: maintains transparent communication, provides clear documentation of the problem and the recovery plan, and offers concessions where appropriate (e.g., additional reporting or fees). Lenders weigh the borrower’s track record, collateral quality, market conditions, and the cost of enforcement before agreeing to a waiver.
For background on the types of covenants lenders use (and where waivers typically apply), see FinHelp’s glossary entry on Business Loan Covenants and the foundational page on Loan Covenant.
Typical reasons lenders grant waivers
- Temporary liquidity shortfalls caused by seasonal swings, supply‑chain delays, or one‑time interruptions.
- Short‑term misses on financial covenants (debt‑to‑equity, interest coverage) that are expected to reverse with forecasted cash flows.
- Strategic transactions—like an acquisition or major capital expenditure—where a covenant would otherwise prevent growth that increases long‑term creditworthiness.
- Regulatory or legal delays that affect operations but do not threaten collateral value.
Lenders are generally reluctant to waive covenants if the breach signals a persistent operational or market decline. The core lender question is whether a waiver improves recoveries versus immediate enforcement.
Types of waivers and common structures
- Technical or de minimis waiver: Clears a minor reporting or measurement error without changing loan economics.
- Covenant waiver (time‑limited): Suspends enforcement of a specific covenant for a fixed period (e.g., three or six months).
- Forbearance agreement: Broader than a waiver; may include payment deferrals and additional covenants.
- Amendments with waiver language: The waiver is rolled into a longer‑term amendment that permanently changes the covenant or adds new terms.
Waivers often include conditions: extra reporting, covenant resets, additional collateral, higher margins, up‑front fees, or covenant testing on a different calendar.
What lenders consider before granting a waiver
Lenders broadly evaluate: borrower credibility, collateral and cash‑flow projections, the reason for breach, covenant history, and systemic risks. Many lenders will also consider whether granting a waiver is consistent across a syndicated facility or if majority consent is sufficient under the credit agreement.
Key lender checks include:
- Updated financials and 13‑week cash forecasts.
- Management track record and plans to remediate the breach.
- Stress tests under downside scenarios.
- Legal review for conflicts with other creditors or security interests.
Regulatory guidance encourages transparent treatment of borrower problems to minimize systemic risk (see Consumer Financial Protection Bureau guidance on fair treatment of borrowers and general lending practices) (Consumer Financial Protection Bureau). Tax consequences or notice obligations may arise in certain transactions — consult the Internal Revenue Service guidance or a tax professional for specifics (Internal Revenue Service).
How to request a waiver — a practical checklist
- Notify your lender early and in writing. Be concise but factual — explain the covenant at risk and timing.
- Provide supporting documents: recent financial statements, cash forecast, and explanation of the event that caused the breach.
- Present a credible remediation plan and timeline. Include milestones and metrics the lender can monitor.
- Offer incremental protections: additional reporting, a temporary covenant reset, or an increased facility fee.
- Ask for clear, time‑limited language and confirm whether the waiver requires borrower board approval or third‑party consents.
- Retain counsel for covenant drafting and to review side‑effects (e.g., cross‑defaults, notice to other creditors).
I recommend packaging the request as a short memo with an executive summary and appendices for detailed schedules — lenders receive many requests and will respond faster to a clean, organized package.
Negotiation levers borrowers can offer
- Up‑front or ongoing fees (transaction or monitoring fees).
- Shorter waiver duration with milestone tests.
- Additional collateral or personal guarantees (for small businesses).
- Increased interest margin or temporary pricing adjustments.
Offering concessions increases the chance of acceptance while preserving negotiating room for the borrower.
Costs and consequences of accepting a waiver
- Fees and higher interest: Waivers commonly carry fees or higher spreads to compensate lenders for added risk.
- Reporting obligations: Expect more frequent covenant compliance reports or covenant compliance certificates (see FinHelp’s Covenant Compliance Certificate).
- Precedent and leverage: A granted waiver can alter the borrower’s negotiating leverage in future defaults.
- Credit implications: While a waiver isn’t necessarily a default, it can affect lender ratings and influence refinancing options.
Importantly, a waiver is not a cure for structural problems. If the underlying issues persist, lenders can later decide to enforce remedies or accelerate the loan after the waiver expires.
Documentation and legal form
Waivers should be documented clearly. Common documents include:
- Waiver letter or side letter signed by required lenders.
- Forbearance agreement (if payment relief is part of the deal).
- Amended and restated credit agreement (if covenants are permanently changed).
Make sure the waiver identifies the covenant(s), the period of relief, any conditions, and whether the waiver prevents the lender from exercising remedies during that period.
Real‑world examples (anonymized)
- A midsize manufacturer missed an interest coverage test after a major customer delayed payments. The borrower provided a three‑month cash recovery plan, agreed to weekly reporting, and paid a one‑time fee. The bank granted a three‑month waiver and the borrower returned to compliance.
- A software company sought to exceed a capital‑expenditure bucket to buy a small competitor. The lender granted a waiver conditioned on a post‑acquisition covenant reset and an equity cushion maintained for 12 months.
Both cases shared features lenders value: clear plans, added transparency, and concessions that reduced downside risk.
When to involve counsel or advisors
If your situation involves syndicated loans, intercreditor issues, material amendments, or significant collateral, involve experienced counsel. Also engage financial advisors for projections and stress tests. These professionals help draft precise waiver language and ensure no unintended defaults or cross‑defaults are triggered.
Common mistakes to avoid
- Waiting until a covenant is breached to contact the lender.
- Submitting incomplete documentation.
- Accepting vague waiver language — demand clear timelines and measurable conditions.
- Ignoring tax or regulatory consequences.
Quick FAQ
Q: How long do waivers typically last?
A: Commonly from 30 days to 12 months; many are 3–6 months, but duration depends on the lender and the borrower’s remediation plan.
Q: Will a waiver show up on my credit?
A: A waiver itself is not typically a public credit event, but lenders’ internal risk ratings may change and can influence future credit decisions.
Q: Is a waiver the same as an amendment?
A: No. A waiver temporarily suspends enforcement; an amendment changes the contract terms (permanent or long‑term).
Final guidance and next steps
A covenant waiver is a practical tool to avoid an immediate default when a breach is short‑term and remediable. Approach a waiver request early, provide transparent documentation, and be prepared to offer concessions. Always involve counsel for drafting and for syndicated or secured facilities to avoid downstream surprises.
This article is educational and not individualized legal or tax advice. For personalized guidance, consult a qualified loan attorney, certified public accountant, or a licensed financial advisor.
Author note: As a senior financial advisor and content editor, I’ve negotiated and reviewed dozens of waiver requests across industries; pragmatic, well‑documented requests increase the chance of a favorable outcome.
Authoritative sources: Consumer Financial Protection Bureau (general lending and borrower treatment guidance) and Internal Revenue Service (tax and reporting considerations).
