You are reading the financial covenants section of your term sheet. One of the conditions is the Solvency ratio covenant. Here is what it measures, why the bank includes it, and what to check before you sign.
What the bank is measuring
A solvency ratio covenant requires the borrower to maintain minimum equity as a percentage of total assets (Equity ÷ Total Assets). It measures the company’s long-term ability to meet obligations.
What this means: Asset growth (e.g., through investment or acquisition) must be supported by proportional equity growth. Debt-financed expansion that increases total assets without equity contribution will erode the ratio.
What to check
Distinct from debt-to-equity: solvency ratio uses total assets as denominator, not equity
Belgian banks (particularly Belfius and KBC) use this as a standard credit metric
IFRS 16 lease capitalisation may inflate total assets and compress the ratio
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Solvency 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 Solvency 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 Solvency ratio covenant?
A solvency ratio covenant requires the borrower to maintain minimum equity as a percentage of total assets (Equity ÷ Total Assets). It measures the company’s long-term ability to meet obligations.
What happens if you breach a Solvency ratio covenant?
Asset growth (e.g., through investment or acquisition) must be supported by proportional equity growth. Debt-financed expansion that increases total assets without equity contribution will erode the ratio.
Can you negotiate a Solvency ratio covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Solvency 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.