Covenant waivers: which right the lender gives up and what it gets in return

A waiver is a lender's targeted decision not to exercise a right that has already arisen because a covenant has been breached. The key word here is "already": a waiver does not cancel the covenant itself, nor does it make the breach disappear. It only removes the consequence: the right to declare a default, demand early repayment, raise the interest rate or enforce against the collateral. The covenant stays in the agreement and continues to apply on the next test date. A waiver is therefore narrow by nature: it is tied to a specific breach, a specific period and a specific list of rights that the lender agrees to give up.

What exactly is breached

Covenants fall into maintenance covenants and incurrence (restrictive) covenants. A maintenance covenant is tested regularly: on each reporting date a ratio such as net debt to EBITDA or interest cover is calculated, and it must stay within a set range. A breach here happens on its own, without the borrower doing anything: if the ratio drifts, the covenant is broken. A restrictive covenant works differently. It prohibits an action (taking on new debt, pledging an asset, paying dividends, selling a material business), and it can only be breached by taking that action.

Non-financial covenants form a separate group: deadlines for delivering financial statements, an unqualified audit opinion, retention of the controlling shareholder, maintenance of licences. A missed disclosure deadline may look like a technicality, but legally it gives the lender the same set of rights as a breach of the leverage test.

That is why a waiver is rarely needed in just one place. A cross-default clause links bond issues and loans to one another: a breach under one agreement becomes an event of default under the others, so rights have to be waived across the entire debt stack at once. An issuer's outstanding bonds and their terms are easy to look up in the bonds section, while the OFZ curve provides the benchmark for comparing yields.

Waiver, amendment and forbearance are different tools

They are often confused, although legally they do different things.

• Waiver: giving up the consequences of a breach that has already occurred. It looks backwards.
• Amendment: a change to the wording of the covenant itself, such as widening the range, moving the test date or excluding an item from the calculation of the ratio. It looks forwards and removes the problem for future periods.
• Forbearance: the lender's promise not to press its claims for an agreed period. The rights do not disappear; they are frozen, and once the period expires everything reverts.

In practice the document is often called a waiver and amendment agreement and contains both: forgiveness of the past breach plus a reset of the threshold for the future. This matters to an analyst: a waiver without an amendment means the breach will most likely recur on the next reporting date.

How it is documented in loans and in bonds

In a bilateral loan, a waiver is a matter of correspondence with the bank. In a syndicate, the consent of lenders holding an agreed share is required, and for sensitive provisions, the consent of all of them.

In public debt the mechanism is more cumbersome. The terms of a bond issue are changed not by agreement but through a general meeting of bondholders, whose convening procedure and quorum are set by the securities market law and the issue documentation. The bondholders' representative, if one has been appointed, acts as the technical party to the process. Every decision goes through disclosure, so the trail of a waiver shows up in the issuer's announcements, which are worth following in the news feed and the corporate events calendar.

A waiver never comes free

The lender is giving up a right it paid for when it agreed to the interest rate. In return it usually receives some combination of the following: a one-off consent fee (waiver fee), a margin step-up for the remaining term, additional collateral or a group guarantee, a tighter threshold for subsequent periods, a ban on dividends and a cap on capital expenditure until the ratio recovers, and an undertaking to apply proceeds from asset sales to early repayment. Sometimes the lender also obtains the right to demand repayment on a repeat breach without any new consent process.

For a shareholder, this is the real substance of the news. The waiver itself removes the risk of an immediate default, but the price of consent shifts cash flow from the owner to the lender, often precisely through a dividend restriction. The effect on payouts can be seen in the dividend history, while the reason usually has to be found in the notes to the financial statements in the reports section.

Where to spot the signal early

A waiver is the resolution, not the start of the story. It is usually preceded by a shrinking headroom against a maintenance covenant threshold, a delay in publishing financial statements, an auditor's going-concern qualification, and wording in the notes about reclassifying long-term debt as short-term. The last one is especially telling: under accounting rules, a breached covenant without a waiver obtained before the reporting date moves the entire debt into current liabilities, and the balance sheet structure deteriorates sharply without a single new transaction.

A frank caveat about the data

A waiver is not captured by any market metric and does not sit in the site's numerical sections. No line of quotes or multiples will tell you whether lender consent has been obtained. This is information from disclosure: the issuer's announcement, the minutes of the bondholders' meeting, the notes to the financial statements. The numerical sections help to assess the consequences — the repricing of the bond's yield, the share price reaction, a change in dividend policy — but they do not replace reading the primary source. Definitions of related concepts, should you need them along the way, are collected in the glossary.