A Practitioner’s Guide to Covenants, Baskets, EBITDA Add-Backs and What the Lender Can Actually Do
Julian R. Sterling
These are the companion files of How to Read a Credit Agreement by Julian R. Sterling.The book on Amazon →
Five Excel workbooks that reproduce every figure the book prints, four of them now corrected where the
book is wrong. Around them: the same models with every input emptied, thirteen working documents to
print, forty questions that mark themselves, and three cases the book names and never takes to a
number. All free. Nothing is gated behind a sign-up, and no email address is asked for.
Thirteen workbooks, the printable documents and the read-me. Each group below can also be
downloaded on its own. Last revised 23 September 2026.
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The book’s own files. 89 figures are checked against what the book prints, and all 89 reproduce;
thirteen of them carry a figure the first edition printed differently, and say so.
Chapters 2 to 30 · the whole facility
Kestrel: the complete facility, twenty-eight quarters
A seven-year unitranche built from one sheet of assumptions. The covenant tests, the
margin ratchet, the cash sweep and the headroom all follow from the inputs; nothing is typed
twice, so changing one number moves everything that depends on it and nothing that does not.
Go to sheet 4 and read the headroom column. Then go back to Assumptions and set the
add-back cap to 100 per cent. Quarters 9 to 11 come back into compliance
— and nothing about the business changed. That is the argument of the book in
one keystroke.
Headroom is shown in EBITDA rather than in turns, deliberately. “0.21 turns of
headroom” means nothing to anybody; €0.8 million of EBITDA means the
company is one bad month from a default, and that is the same fact stated so a credit
committee can act on it.
A sixth sheet, added in this revision, computes what the clause-by-clause chapters print, and
corrects seven of those figures. The margin grid moves six times in five years, not four, and a
45-day certificate lag on its downward steps costs 0.21, not 0.170. The year-four sweep takes
1.23, not 0.9. A 15 million cash cap first bites at Q19 and adds 2.76 to net debt at Q20,
not nothing at Q16. And Kestrel is portable in Q1 to Q5 as well as from Q15.
The definition of Consolidated EBITDA, quarter by quarter: what is claimed, what the cap
allows, and what survives. On the base case the add-back is the only thing passing the
test in quarters 7 and 8 — 5.97× and 6.65× unadjusted against a
5.75× covenant — and the 20 per cent cap disallows €0.32 million
in quarter 8 alone.
Then the run-off. The add-back is a two-year concession and the covenant steps down at
quarter 9. Both happen in the same quarter, which is why the breach lands where it does.
Change either date and watch the default move: it is a drafting outcome, not a trading
one, and the two dates were agreed by different people on different days.
A new sheet moves the run-off to 36 months. With the 20 per cent cap kept, as Chapter 28
has it, Q9 passes by €0.41 million, not the 0.61 the first edition prints; 0.61 is
Chapter 23’s uncapped case.
The same quarter cured two ways. As deemed EBITDA the sponsor writes
€3.59 million; as a prepayment it writes
€19.74 million — 5.5 times as much for identical covenant
compliance, because a prepayment has to move net debt rather than the numerator.
The cap sheet then does the arithmetic nobody does at signing: three breach quarters against
a two-in-four cure limit. The third one cannot be cured whatever the sponsor is willing
to fund — which means the negotiated cure right does not cover the case it was
negotiated for. That is worth knowing on the day the term sheet is signed rather than on the day
the third breach arrives.
And a prepayment stays paid. After 19.74 at Q9, Q10 passes at 5.21× and Q11 at 4.84×
without another cure, so over the whole breach the prepayment drafting costs 19.74, not the 33.25
Chapter 22 adds up, and the gap between the conventions is €13.70 million, not 27.20.
The four grower baskets, sized at every quarter’s Consolidated EBITDA and at unadjusted
EBITDA, so the capacity the add-back creates is a number: 5.88 at Q1. From Q9 every basket has
collapsed onto its fixed floor, which is the feature of a grower basket that reads as innocuous
in the definitions and is not.
The MFN sheet prices the sunset: 2.06 a year while the protection runs, 10.31 over five years
to run (the first edition prints 8.25, which is four), and nothing the day after it expires. A lender that has not put a number on that day has priced only half of
what it agreed to.
The sixty-four questions of Appendix A as a sheet you can work in: the same questions,
in the same order, generated from the same source file as the chapter, so the book and the
workbook cannot drift apart.
There are columns for the answer, the source document, the owner and the
date. The status column is computed, and it marks any question answered without a source as
“unsourced” — because an answer whose authority is
“the borrower says” is not an answer. The Progress sheet counts only the sourced
ones, in total and by section.
Work top to bottom on a first read. On a re-read start with Definitions and Financial
covenants: they are what the arithmetic of the book turns on, and they are the two sections you
can answer from the document alone.
The default in this facility is not produced by trading. It is produced by
two dates in the definitions — the expiry of a two-year add-back
concession and a covenant step-down — landing in the same quarter. Move either one and the
breach disappears without a euro of EBITDA changing. That is why the workbook makes both dates
inputs, and why the run-off sheet exists at all.
Why the cure right is narrower than it reads
A cure right is negotiated because the sponsor expects a bad patch, and a bad patch is rarely one
quarter long. Against a two-in-four limit, three consecutive breach quarters leave the third
uncurable — not expensive, uncurable. The limit is usually the least-discussed line
in the section, and it is the one that decides whether the right is worth anything in the case it
was bought for.
The two forms of cure are also not interchangeable at any price. Deemed EBITDA and prepayment
produce the same covenant outcome for
€3.59 million against €19.74 million. Which form the
agreement permits is therefore worth about sixteen million euros in this single quarter, and it is
settled by one clause.
The same models, for your own borrower
The four model workbooks with every input emptied. Each checks sheet counts what is still missing and tests what holds for any inputs.
Blank set · four workbooks
Your facility, your definition, your breach
Kestrel’s twenty-eight quarters with the 74 inputs emptied: the transaction, the definition of Consolidated EBITDA, the covenant levels and cure limits, and the trading, quarter by quarter. The headroom test on the defined and the unadjusted number; the cure priced both ways, with a prepayment kept once paid; the baskets and the MFN. The model stays blank until its inputs are in, then runs every sheet.
The book’s figures are listed in a text file inside the archive. Type Kestrel back in and the files return 0.83 of headroom at Q8, a breach from Q9, and cures of 3.59 and 19.74.
Thirteen pages to print and take into a meeting. A4, with margins wide enough for US Letter.
Chapters 4 to 28
Thirteen working documents
The ninety-minute read with the five questions that catch most problems. Consolidated EBITDA and Net Debt line by line. The calendar that lays the step-downs over the run-offs, with headroom in EBITDA at every test date. Both covenants and what the hedge does to them. The equity cure priced both ways. The compliance certificate in prescribed form. The basket register with the builder. Incremental debt, MFN and the sunset. What the lender holds on the day of the breach. The lender’s quarterly five. The borrower’s playbook. The negotiation record. And security, the intercreditor and the recovery.
A workbook that marks itself. Answer in the yellow cells; the marking fills in as you go.
All parts of the book
Forty questions on the book
Seven on the definitions, the headroom and the cure, seven on the ratchet, the sweep, the baskets and MFN, seven on information to amendments, seven on security to amend-and-extend, six on the clauses and the three other borrowers, and six on the three cases below. Numbers are marked to a tolerance, multiple choice to the letter, and the score sheet counts your errors part by part: that is your revision list.
Where the book has been corrected, the question says so. The marking sheet holds every answer, every tolerance and the reason for each.
New material, not a restatement. Three situations the chapters name and never take to a number. Each case is one workbook: the note is the first sheet, the model is the rest, and a checks sheet closes it. Type your own figures in and every finding recomputes.
Chapters 8 and 10 · Case one
The basket that builds
Chapter 8 says a builder basket “becomes the largest basket in the document by year four or five”. On Kestrel, at 50 per cent of retained cash flow, it is worth 1.85 at year four and 6.38 at year five, and is the largest basket only in year seven: the sweep and the breach years eat the retained cash. Small as it is, it lifts the dividend capacity at Q20 to 12.88, and the sponsor can take 12.76, every euro retained since closing: leverage from 3.56× to 3.95×, all of it permitted.
Chapters 18 and 19 · Case two
The hedge in the waterfall
Kestrel’s swap on half the facility after rates fall 1.5 points: a mark of 3.03, Chapter 19’s example almost exactly. Counted as debt it cuts Q8 headroom from 0.83 to 0.30; ranked second in Chapter 18’s waterfall it takes 2.2 points of recovery. And the hedge meant to protect interest cover keeps it in breach: Q9 cover 1.91× half hedged, 2.12× floating.
Chapter 25 · Case three
The lender who does not extend
Chapter 25’s two-year extension at Q20, with 30 per cent of the lenders saying no. Their stub of 40.03 falls due at the original maturity, against 30.81 of cash above the operating retention: a gap of 9.22, because the extending lenders’ fee, margin and amortisation consume the cash. Above 22.6 per cent not extending, the extension has solved nothing, and the number can be computed before the request goes out.
89 figures in the four model workbooks, each beside the figure the book prints; every other workbook ends with its own checks
ADDED
a figure the book does not give, used in the cases and marked wherever it appears
Amounts are in millions of euros, and Kestrel Industrial is fictional and deliberately simple:
it exists to show a mechanism, not to represent a company. 89 figures are tested across the four model workbooks, and all 89
reproduce. The quarter 10 deemed-EBITDA cure, once marked “rounding”, reproduces now that net
debt is carried to four decimals: 2.4553, which the book prints as €2.46 million. Where the book is
wrong, the check carries the corrected figure and says what the first edition printed, because a
check that widens its own tolerance until everything passes is not a check.
Go beyond the companion files
How to Read a Credit Agreement develops the complete framework behind these models, with the assumptions, trade-offs and worked examples tied together.
The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers; the PDF
prints on A4 or US Letter. They use no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks
to update links on opening, decline — there are none.
What changed, and when
23 Sep 2026
Four workbooks corrected. Kestrel gains a sheet computing the clause-by-clause figures: the margin grid moves six times in five years, not four; the certificate lag costs 0.21, not 0.170; the year-four sweep takes 1.23, not 0.9; a 15 million cash cap bites from Q19; Kestrel is portable in Q1 to Q5 too. A prepayment cure stays paid: 19.74 once over the breach, a gap of 13.70 between the conventions, not 27.20. The 36-month run-off with the cap kept passes Q9 by 0.41, not 0.61; the MFN sunset is worth 10.31 over five years, not 8.25. 89 checks, all reproduced. Added: a blank set of the four models, thirteen working documents, forty questions that mark themselves and three new cases. Each workbook can now be downloaded on its own.
How are break costs calculated on a loan prepayment?Fixed rate less redeposit rate, times the days left in the interest period: 50m prepaid at 3.10% EURIBOR against 2.65% costs 31,875, not the 315,208 with margin.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
Trade FinanceSix routes to payment on one 4,200,000 export order cost between 178,040 and 223,268, a spread worth 14.8 per cent of the margin, and a day of buyer credit costs 1,031.76.
Cost AccountingOne factory costed twice on the same 13,440,000 of overhead, and 4,053,091 moves between four product families.
Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.
Contract ManagementA bid 5.50 a unit cheaper, signed on paper worth 9.81 a unit more — and 94.68 per cent of it was knowable on the day of signature.
Capital MarketsFour defensible readings of one bond, the cost of an issue under each convention, and the placement discount computed at a constant discount.
Financial RegulationThree ratios pass and the fourth is in breach by 1,956.0 million: the output floor, the liquidity buffer after encumbrance, and the loan split.
Bank ManagementFour defensible readings of one balance sheet, the deposit beta measured two ways, and the liquidity that lasts 3.9 days.
The Real Estate WorkoutFour ways out of one broken loan, discounted to today, and the 58.7 cents at which a payoff beats enforcement.
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