Covenant reset
What is a covenant reset, and what do lenders ask for in return?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A covenant reset changes the level of a financial covenant for future test dates, usually loosening it after a breach or ahead of one that is coming. Unlike a waiver, which excuses one breach, a reset changes the test going forward. Lenders often ask for something in return, such as a fee, a higher margin, tighter reporting, new equity or a shorter term, and they read a run of resets, each set just above the latest result, as a covenant that no longer warns anyone.
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.
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- 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
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