Covenant waivers and resets

The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:

  • Covenant waivers and resets
  • Options
  • Purpose of covenants
  • Types of covenant
  • Breach of covenant
  • Rationale for waivers
  • Covenant resets
  • Key steps
  • Tax relief

Covenant waivers and resets

One of the initial signs of distress is usually a covenant breach by the company. The lenders may agree to a simple waiver, which cures a temporary blip in the company's performance, or it may signal the need for more extensive restructuring to come. It will be crucial to check how often the covenants are tested and if the company is not expected to pass the next covenant test, a covenant waiver may be appropriate.


A covenant waiver or reset is a less extreme form of restructuring than the following options:

  1. equity injection (in return for which, the equity provider usually seeks a covenant holiday or loosening of covenants) (see Practice Note: New money and equity injections in a restructuring situation)

  2. sale of non-core assets

  3. refinancing by new lenders

  4. debt restructuring (see Practice Note: Debt waivers, extending maturity and debt rescheduling)

  5. debt for equity swap (see Practice Note: Debt for equity swaps)

Sometimes the waiver is enough to allow the company to get through an isolated patch of harsh trading conditions to return to health. The existing equity holders obviously prefer the less drastic remedy of a covenant waiver or reset to a debt for equity swap where their equity may be diluted or totally extinguished. If the problem is more serious, the company should ensure lenders enter a standstill agreement, which incorporates

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