Covenant mulligan
What is a covenant mulligan in a leveraged loan?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A covenant mulligan is a clause in some leveraged, sponsor-backed loans under which one breach of a financial covenant is not an event of default: default arises only if the covenant is breached at a second test date, and in rarer versions only if that is the next one. It gives a borrower a bad quarter without a default and without the owners having to put in money. It is rarely seen in UK mid-market lending, and lenders who agree to it may limit how often it can be used.
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.
// WHAT IT IS NOT
An equity cure fixes a breach with new money from the owners; a mulligan simply disregards the first breach. A deemed cure is different again: the first breach is a default, but it falls away if the next test is passed before the lender acts.
// 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-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)
- Capex covenant
- Guarantor coverage test
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