You are reading the financial covenants section of your term sheet. One of the conditions is the Interest 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 interest coverage ratio (ICR) requires your EBIT to exceed interest expenses by a minimum multiple. It measures your ability to service interest payments from earnings.
What this means: If profitability declines or interest rates rise (on variable-rate debt), your coverage ratio tightens. This creates pressure to maintain margins and control costs to ensure interest payments are comfortably covered.
What to check
Variable rates: rising EURIBOR increases your denominator, tightening coverage
One-off costs that reduce EBIT can trigger breach in otherwise healthy businesses
Some definitions use EBITDA instead of EBIT — this is more forgiving
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Interest 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 Interest 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 Interest coverage ratio covenant?
An interest coverage ratio (ICR) requires your EBIT to exceed interest expenses by a minimum multiple. It measures your ability to service interest payments from earnings.
What happens if you breach a Interest coverage ratio covenant?
If profitability declines or interest rates rise (on variable-rate debt), your coverage ratio tightens. This creates pressure to maintain margins and control costs to ensure interest payments are comfortably covered.
Can you negotiate a Interest coverage ratio covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Interest 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.