What are the odds you breach the covenant?
Leverage covenants are tested on numbers that move. Draw EBITDA as an honest range and the covenant test becomes what it really is: a breach probability, not a checkbox.
Finance Starter Monte Carlo Pro engine
After you install, this is the model to open.
How Close Is the Covenant?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
Twenty thousand simulated tests:
- Leverage, mean
- 3.05x
- Leverage, P95
- 3.43x
- Covenant breached
- 2.4% of trials
A 2.4% breach probability is a number you can take to the board or to the lender, and it moves fast: cut the EBITDA floor to $3.9M and rerun to watch it more than double, to about 5.2%. The distance between "compliant today" and "3.43x at P95" is the actual risk conversation.
The model
$15.6M of debt against a 3.5x ceiling, with trailing EBITDA drawn PERT 4.1-5.2-5.9M, the shape of a business with more downside surprise than upside.
| Total debt | $15.6M |
| Covenant ceiling | 3.5x |
| Trailing EBITDA | PERT 4.1-5.2-5.9M |
| Breach probability | simulated |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- Every line looks fine. Will the year still go over?Will the Budget Hold?
- How far could next year miss the revenue plan?What Will Next Year's Revenue Be, as a Range?
- How much of your risk is just the exchange rate?What Does the Exchange Rate Do to Profit?
- Does growth or margin move your profit more?How Do Growth and Margin Move EBITDA Together?
- How far apart are your best year and your worst?Base, Better, Worse: Save the Three Cases
- Which thirty invoices should you actually check?Pull a Fair Sample of Invoices to Check
Every model like this one, and the method behind them: Monte Carlo simulation.