Debt classification on a covenant breach
Why can a covenant breach at year end turn long-term debt into a current liability?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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Under the usual accounting standards, a loan in breach of a covenant at the balance date — with no waiver obtained by then that takes away the lender's right to demand repayment — can have to be shown as due within a year, however long its term. The balance sheet changes shape: working capital can turn negative, the going-concern assessment tightens, and the accounts tell every other reader about the breach. That is why waiver requests arrive in December, and why a lender reads the breach before it signs a letter dated to fix the accounts.
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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