hard · Private Credit documentation-covenants-terms

Which subtle drawback makes the average-of-quarter-ends approach potentially WORSE for the lender than tightening the single-date covenant?

1. Averaging four quarter-end snapshots can mask a sharp, sustained deterioration in the most recent quarter by blending it with three stronger prior quarters, delaying breach until the damage is already advanced
2. Averaging effectively converts the maintenance covenant into more of an incurrence-style covenant, since it is tested only when the borrower takes a new action instead of on a continuous basis.
3. A four-quarter average inherently double-counts the seasonal Q1 leverage peak across its rolling window, systematically overstating true leverage and thereby triggering false covenant breaches unnecessarily.
4. Averaging quarter-end ratios together is mathematically identical to running a single trailing-twelve-month EBITDA test, so it merely adds compliance cost without changing the underlying protective outcome at all.

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