You are reading the financial covenants section of your term sheet. One of the conditions is the Fixed charge coverage ratio covenant. Here is what it measures, why the bank includes it, and what to check before you sign.
What the bank is measuring
An FCCR measures cash flow available to cover all fixed obligations: debt service, rent/lease payments, and sometimes CapEx. Broadest coverage test.
What this means: This captures obligations that ICR and DSCR miss. Lease-heavy businesses face tighter FCCR even with low debt levels. All fixed costs compete for the same cash.
What to check
Fixed charge definition varies significantly between lenders — check what’s included
Operating lease obligations (post-IFRS 16) may or may not be included
Most restrictive of the three coverage ratios
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Fixed charge coverage ratio covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.
What to do next
The fastest way to see whether a Fixed charge coverage ratio covenant — and every other condition — is in your term sheet is to let Credia read it for you. Upload the PDF and you get every covenant identified and explained, in plain language, in under two minutes.
Analyse your term sheetFrequently asked questions
What is a Fixed charge coverage ratio covenant?
An FCCR measures cash flow available to cover all fixed obligations: debt service, rent/lease payments, and sometimes CapEx. Broadest coverage test.
What happens if you breach a Fixed charge coverage ratio covenant?
This captures obligations that ICR and DSCR miss. Lease-heavy businesses face tighter FCCR even with low debt levels. All fixed costs compete for the same cash.
Can you negotiate a Fixed charge coverage ratio covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Fixed charge coverage ratio covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.