hard · FRM Part 2 Current Issues
A firm has a loan with a 'maintenance covenant' requiring a Net Debt/EBITDA ratio ≤ 4.0×. The current ratio is 3.8×.
If the firm's EBITDA declines, when can the lender intervene?
- Immediately as soon as the internal EBITDA projections suggest a future breach.
- Only if the firm actually defaults on a scheduled interest or principal payment.
- At the next periodic test (e.g., quarterly) where the ratio exceeds 4.0×.
- Only when the firm attempts to issue new debt or pay a dividend.
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