Covenant headroom

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

Covenant headroom is the distance between a borrower's current performance and the level at which a covenant is breached — enough room that ordinary volatility does not trigger extraordinary process. Headroom is only half the question. A covenant tested on calendar dates against a business running on a trade cycle can print its worst ratio at the same point every year while nothing is deteriorating, because the test lands when the facility is drawn and the receipts have not yet arrived. Before repricing or declining, ask whether the covenant date is the problem.

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.