Capex covenant
What is a capex covenant, and how do carry-forward rules work?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A capex covenant caps how much a borrower may spend on capital expenditure in each financial year, so that cash the lender expects to service its loan is not committed to new plant or projects. Many allow unspent amounts to be carried into the next year and some allow spending to be brought forward: with a US$10m annual cap and US$7m spent this year, a full carry-forward lets the borrower spend up to US$13m next year. A lender reads the cap against the business's maintenance needs, because a cap set too tight can push a borrower to defer replacements it needs.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORKED IN
// NEXT TO IT
- Covenant headroom
- Negative pledge
- Condition precedent (CP)
- Event of default
- Covenant waiver
- Reservation of rights
- Term sheet
- Condition subsequent
- Review event
- Repayable on demand
- Material adverse change (MAC) clause
- Cross-default
- Change of control clause
- Cure period
- Compliance certificate
- Information undertakings
- Liquidity covenant
- Equity cure
- Springing covenant
- Covenant reset
- Covenant mulligan
- Covenant-lite (cov-lite)
- Incurrence covenant
- Test date (covenant)
- Permitted baskets
- Distribution lock-up
- Mandatory prepayment
- Clean-up period
- Certain funds
- Yank-the-bank clause (replacement of lender)
- Guarantor coverage test
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