What is a typical springing covenant trigger?

There is no fixed level. The trigger is negotiated as a share of revolver commitments, sometimes as the greater of a share and a fixed sum, and the share has moved with market conditions: law-firm market reviews of European sponsor deals described triggers drifting upward through the 2010s. The 40% in this page's example belongs to the example. What matters as much as the percentage is what the agreement counts as usage, and whether it is read only on the test date.

Do letters of credit count towards a springing covenant trigger?

Only if the agreement says so. Many agreements exclude letters of credit and bank guarantees issued under the revolver, in full or above a set amount, on the argument that they are contingent until called. Others count them, especially where the facility allows a large share to be used that way. Once a letter of credit is paid out and the amount becomes a loan under the facility, it is a cash drawing and usually counts.

What happens if a springing covenant is breached?

It is an event of default under the revolving facility, but usually the revolver lenders' alone. Agreements commonly give the right to accelerate, and to waive or amend the covenant, to a majority of the revolver lenders. Term lenders typically cannot treat the breach as their own default until the revolver lenders have acted on it. In practice the breach opens a negotiation, often over a waiver, a reset or an equity cure.

Can a borrower avoid a springing covenant by repaying the revolver?

Often, yes. Because usage is usually read on the test date, repaying drawings below the trigger before that date means the covenant is not tested, even if leverage is well above the level. Some European sponsor agreements also let the borrower cure a breach after the event by repaying the revolver below the trigger. A lender who wants to see through this reads drawing levels across the whole quarter, not only at its end.

// WORKED EXAMPLEHOW THE TRIGGER WORKS

Springing Covenant: a Worked Example

The test arrives with the drawing, not before it.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

A springing covenant is a revolving facility's ratio test with a switch on it, and at each quarter end the lender reads the switch before the ratio: is enough of the revolver in use for the test to count? If not, no breach exists, whatever the leverage. The design protects the lenders whose money is most at risk, those who provide the revolver, while leaving term lenders without a quarterly test. Its weakness is timing. The trigger is read on a single day, the borrower controls how much is drawn on that day, and the ratio is tested only once the business has already needed the cash.

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.

// MAKE THE CALL

Issue 04 — Highview Industries. Same request as Issue 01 on the surface. A completely different file underneath. Your call first, then the senior banker's.

Read the file →

// 01 — WHY A REVOLVER LENDER WANTS ONE

A term lender's money is lent on day one, and its risk is that the business shrinks beneath the loan. A revolver lender's money is lent when the borrower asks for it, and a borrower asks hardest when trading is going badly, so the revolver's exposure grows as the credit weakens. Where the term loan carries no maintenance test, the banks providing the revolving facility commonly keep one for themselves: a single ratio, usually net leverage, that applies only once the revolver is meaningfully drawn. That is the springing covenant.

The structure travels with covenant-lite term debt. It is found in UK and European sponsor deals and in larger Australian deals written on those terms. In bank lending to mid-sized businesses in New Zealand and Australia, where the facility usually carries full maintenance tests, a springing test is unusual.

// 02 — HOW THE TRIGGER IS WRITTEN

Usage = revolver drawings counted under the definition, on the test date

Trigger = usage above the set share of commitments (or a fixed amount)

If tripped: net leverage tested against the covenant level

If not: no test, no breach, whatever the ratio

Three drafting points decide how often the test bites. The first is the threshold, written as a percentage of commitments and sometimes as the greater of a percentage and a fixed sum, so that cancelling part of the facility does not lower the trigger. The second is what counts as usage. Cash drawings count; letters of credit and bank guarantees issued under the revolver are often left out, in full or up to an amount, on the argument that they are contingent until called, and non-cash ancillary lines may be excluded too. The third is when usage is read: most agreements look only at the test date. The rights that follow a breach usually belong to a majority of the revolver lenders alone, and term lenders' cross-default can be postponed until the revolver lenders act.

// 03 — THE EXAMPLE

A sponsor-backed laboratory testing group, constructed for this page, has a US$150m covenant-lite term loan and a US$30m revolving facility. The revolver carries a net leverage test of 6.50 times that springs when cash drawings exceed 40% of commitments, US$12m; letters of credit are excluded. Both levels belong to the example and are not offered as market norms.

March: drawn 8 of 30 = 26.7% → not tested

net debt 150 + 8 − 5 cash = 153; 153 ÷ 22.0 = 6.95×

June: drawn 15 of 30 = 50.0% → tested

net debt 150 + 15 − 6 cash = 159; 159 ÷ 21.0 = 7.57× breach

In March the group is already past the covenant level, and nothing has happened, because the revolver is lightly drawn. In June it needs the facility and the test arrives with the drawing. Now suppose the treasurer sees June coming and uses US$4m of the cash to repay the revolver the day before the test date:

June, after repaying 4: drawn 11 of 30 = 36.7% → not tested

net debt 150 + 11 − 2 cash = 159; 159 ÷ 21.0 = 7.57×

Net debt is unchanged, because the repayment came out of cash. The ratio is unchanged. Only the trigger has moved, and the covenant no longer applies. If the group redraws the US$4m in July, the drawing and the cash are back where they were, the leverage has not moved, and the revolver lenders have no test until September.

DEFINED IN ONE PARAGRAPH → · REVOLVING CREDIT FACILITY → · THE TEST DATE →

// 04 — HOW IT DIFFERS FROM ITS NEIGHBOURS

A maintenance covenant is tested at every test date. An incurrence covenant is tested only when the borrower wants to take a restricted step, such as borrowing more or paying a dividend, and failing it blocks the step rather than causing a default. A springing covenant sits between them: it is a maintenance test once the trigger is met, with a breach that is an event of default, but it is switched on by the level of drawings on the test date, not by a transaction the borrower proposes.

It also differs from a liquidity covenant, which measures whether the business has enough cash and undrawn headroom. A springing test measures leverage, and it is switched on by the drawing that reduces liquidity. A lender reading a covenant-lite file wants both pictures, because the springing test alone will not show the cash running down until the revolver is in use.

// 05 — WHERE IT DECIDES A FILE

The negotiation is over the threshold and the usage definition, and each exclusion the borrower wins raises the drawn amount at which the test arrives. After signing, the lender's reading changes. Because the test may be off at any given quarter end, a credit officer tracks the leverage the covenant would show on every test date, tested or not, and the peak drawing within each quarter rather than the balance on the last day. A group that keeps its quarter-end drawing just under the trigger while drawing heavily in between is telling the lender something the compliance certificate will not. The question at renewal is whether the revolver has been used as a working capital line, as intended, or as the facility that funds the losses the term loan's missing covenants would have caught.

LOAN COVENANTS, EXPLAINED → · COVENANT HEADROOM →

// QUESTIONS PEOPLE ASK

What is a typical springing covenant trigger?: There is no fixed level. The trigger is negotiated as a share of revolver commitments, sometimes as the greater of a share and a fixed sum, and the share has moved with market conditions: law-firm market reviews of European sponsor deals described triggers drifting upward through the 2010s. The 40% in this page's example belongs to the example. What matters as much as the percentage is what the agreement counts as usage, and whether it is read only on the test date.
Do letters of credit count towards a springing covenant trigger?: Only if the agreement says so. Many agreements exclude letters of credit and bank guarantees issued under the revolver, in full or above a set amount, on the argument that they are contingent until called. Others count them, especially where the facility allows a large share to be used that way. Once a letter of credit is paid out and the amount becomes a loan under the facility, it is a cash drawing and usually counts.
What happens if a springing covenant is breached?: It is an event of default under the revolving facility, but usually the revolver lenders' alone. Agreements commonly give the right to accelerate, and to waive or amend the covenant, to a majority of the revolver lenders. Term lenders typically cannot treat the breach as their own default until the revolver lenders have acted on it. In practice the breach opens a negotiation, often over a waiver, a reset or an equity cure.
Can a borrower avoid a springing covenant by repaying the revolver?: Often, yes. Because usage is usually read on the test date, repaying drawings below the trigger before that date means the covenant is not tested, even if leverage is well above the level. Some European sponsor agreements also let the borrower cure a breach after the event by repaying the revolver below the trigger. A lender who wants to see through this reads drawing levels across the whole quarter, not only at its end.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · THE LOAN · PROTECTION

A company with a US$25m senior secured bank loan and US$20m of unsecured notes fails. After the costs of the process, its assets realise US$30m.

Who gets what?

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE GLOSSARYIN ONE PARAGRAPHSpringing covenant What is a springing covenant on a revolving credit facility?