Why does covenant EBITDA differ from the EBITDA in our board deck?

Because the lender defined it, and your deck did not. The credit agreement lists what gets added back, usually interest, taxes, depreciation, amortization and some non-cash or one-time costs, and it often caps the one-time items. Two definitions in the same company can give answers hundreds of thousands of dollars apart. The certificate uses the agreement.

Trailing twelve months or year to date?

Almost every quarterly test uses the four fiscal quarters ending on the test date. If your books report year to date, you rebuild the twelve months from the four quarters, or from twelve months of activity. Balance sheet items such as funded debt are read at quarter end, not averaged.

A limit that tightens on a schedule. A leverage ceiling might be 3.25 to 1.00 through one year and 3.00 to 1.00 after. Test each quarter against the limit in force on that quarter end. The step-down is where a company that passed comfortably last year suddenly reads tight.

What does "reported, not tested" mean?

An amendment has told you to calculate the covenant and show it on the certificate, but a miss is not a default for that period. You still do the math and deliver it. Note the amendment and its effective date beside the figure so a reader two years from now understands why a low number did not trip anything.

Our books changed after we sent the certificate. Now what?

Do not edit what you sent. Keep the certificate as delivered, record what moved and by how much, and decide whether the lender needs to hear about it. A late accrual that moves net income by ten thousand dollars rarely changes a result. One that crosses a limit is a conversation with the lender, and it goes better when you start it.

Guide

How to calculate leverage, debt service coverage and minimum EBITDA for a compliance certificate

Start from the definitions in your credit agreement, not from the income statement. Build Adjusted EBITDA for the trailing twelve months from net income, add back what the definition lists, and cap what it caps. Leverage is funded debt at quarter end divided by that EBITDA. Debt service coverage is that EBITDA divided by interest plus scheduled principal for the same twelve months. Minimum EBITDA is the EBITDA figure itself against the floor. Use the limit in force at quarter end, and show every line on the certificate.

By Vanward. Published 2026-09-25. Updated 2026-09-25.

Most compliance certificates test three things: how much debt the company carries against its earnings, whether earnings cover the payments, and whether earnings stay above a floor. The arithmetic is simple. The mistakes come from using the wrong definitions, the wrong period, or the wrong limit.

The example below uses Halyard Systems, a fictional software company, and its fictional lender, Keelson Bank. The numbers are round on purpose so you can check each step.

Start with the definitions

Open the credit agreement to the definitions section and find the terms your covenants use. For Halyard they are three.

Defined term	What the agreement says	Measured
Adjusted EBITDA	Net income plus interest, depreciation and amortization, plus non-recurring restructuring charges up to $250,000 in any four quarters	Trailing twelve months
Total Funded Debt	All debt for borrowed money	At quarter end
Debt Service (the agreement calls it Fixed Charges)	Interest expense plus scheduled principal payments	Trailing twelve months

Then check the amendments, newest last. A later amendment can replace a definition, move a limit, or switch a covenant to reported only. Halyard's First Amendment, effective June 30, 2025, made debt service coverage calculate-and-report.

Build Adjusted EBITDA for the twelve months

Take the four quarters ending on the test date. Halyard's quarters are identical, which makes the bridge easy to follow.

Line	One quarter	Twelve months
Revenue	$2,400,000	$9,600,000
Cost of revenue	($900,000)	($3,600,000)
Operating expenses	($1,000,000)	($4,000,000)
Depreciation	($60,000)	($240,000)
Interest expense	($90,000)	($360,000)
Restructuring (non-recurring)	($40,000)	($160,000)
Net income	$310,000	$1,240,000
Add back interest		$360,000
Add back depreciation		$240,000
Add back restructuring (cap $250,000)		$160,000
Adjusted EBITDA		$2,000,000

The restructuring add-back is $160,000, under the $250,000 cap, so all of it counts. Had Halyard spent $400,000, only $250,000 would come back. Show the cap on the certificate either way; lenders look for it.

Leverage: debt at quarter end over twelve months of EBITDA

Halyard's term loan stood at $5,600,000 on the test date. Divide by Adjusted EBITDA.

$5,600,000 / $2,000,000 = 2.80 to 1.00.

The ceiling was 3.25 to 1.00 through 2024 and stepped down to 3.00 to 1.00 in January 2025. Use the limit in force on the quarter end: 3.00. Halyard passes with 6.7 percent of room, which reads tight. A quarter of weaker earnings closes that gap fast.

Headroom, the way lenders think about it

For a ceiling, headroom is (limit minus result) divided by the limit: (3.00 minus 2.80) divided by 3.00, or 6.7 percent. For a floor it runs the other way. Many finance teams treat anything inside 10 percent as a covenant to watch every month, not just at quarter end.

Debt service coverage: EBITDA over what the loan costs

Debt service is interest plus scheduled principal for the same twelve months. Halyard paid $360,000 of interest and was scheduled to repay $1,200,000 of principal.

$2,000,000 / ($360,000 + $1,200,000) = $2,000,000 / $1,560,000 = 1.28 to 1.00, against a floor of 1.25.

Because of the First Amendment, this one is reported, not tested. Halyard still calculates it, still shows it, and writes beside it: reported, not tested per the First Amendment, effective June 30, 2025.

Minimum EBITDA: the figure itself

The simplest of the three. Adjusted EBITDA of $2,000,000 against a floor of $1,500,000 passes with a third of room to spare.

What goes on the certificate

Covenant	Result	Limit on the test date	Status
Senior leverage	2.80 to 1.00	Not more than 3.00 to 1.00	Pass, tight
Debt service coverage	1.28 to 1.00	Not less than 1.25 to 1.00	Reported, not tested (First Amendment)
Minimum Adjusted EBITDA	$2,000,000	Not less than $1,500,000	Pass

Show the bridge from net income, not just the answers. The lender's credit team will rebuild it, and a certificate that already shows each line gets fewer questions.

After you send it

Keep the signed certificate, the statements it went with, and the workbook behind the numbers, exactly as sent. Nine days after Halyard delivered its certificate, a late accrual moved operating expenses up $10,437. Net income fell by the same amount, leverage moved from 2.80 to 2.81, and nothing crossed a limit. Halyard noted it and moved on. The certificate on file still says what was true when it was signed, which is the point.

If you want a quick read on whether your close is ready to support numbers like these, the free close check takes two minutes. Teams already on FinReadi Close keep each lender's covenants, sends and certificates on the debt compliance page.

Questions founders ask

Why does covenant EBITDA differ from the EBITDA in our board deck?: Because the lender defined it, and your deck did not. The credit agreement lists what gets added back, usually interest, taxes, depreciation, amortization and some non-cash or one-time costs, and it often caps the one-time items. Two definitions in the same company can give answers hundreds of thousands of dollars apart. The certificate uses the agreement.
Trailing twelve months or year to date?: Almost every quarterly test uses the four fiscal quarters ending on the test date. If your books report year to date, you rebuild the twelve months from the four quarters, or from twelve months of activity. Balance sheet items such as funded debt are read at quarter end, not averaged.
What is a step-down?: A limit that tightens on a schedule. A leverage ceiling might be 3.25 to 1.00 through one year and 3.00 to 1.00 after. Test each quarter against the limit in force on that quarter end. The step-down is where a company that passed comfortably last year suddenly reads tight.
What does "reported, not tested" mean?: An amendment has told you to calculate the covenant and show it on the certificate, but a miss is not a default for that period. You still do the math and deliver it. Note the amendment and its effective date beside the figure so a reader two years from now understands why a low number did not trip anything.
Our books changed after we sent the certificate. Now what?: Do not edit what you sent. Keep the certificate as delivered, record what moved and by how much, and decide whether the lender needs to hear about it. A late accrual that moves net income by ten thousand dollars rarely changes a result. One that crosses a limit is a conversation with the lender, and it goes better when you start it.

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