Guarantor coverage test
What is a guarantor coverage test in a facility agreement?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A guarantor coverage test is an undertaking that the companies guaranteeing a group's debt together account for at least a set share of the group's EBITDA, and often of its gross assets, so that the lenders' guarantees reach most of the business. It is usually tested with the annual accounts through the compliance certificate, and if the group falls short, more subsidiaries must accede as guarantors. In one composite file the test is 80% and group EBITDA US$50m: guarantors earning US$38m cover 76%, so subsidiaries earning at least US$2m more must join.
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
- Covenant reset
- Covenant mulligan
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- 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
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