A review is a checklist, not a mystery
A borrower who has never been through a formal covenant review often imagines something invasive — a credit analyst combing through every transaction, second-guessing every judgment call. The reality, for most straightforward compliance reviews, is closer to a defined checklist run against a defined set of documents.
Knowing what's actually on that checklist turns the exercise from a source of anxiety into something you can run against your own financials first, well before a lender's credit team ever opens the file.
Whether figures tie back to the source statements
Checked by: comparing the figures reported on the calculation schedule against the actual financial statements submitted alongside it — a mismatch between a number on the schedule and what the underlying statement shows is the most basic and most commonly caught issue.
Why it comes first: every other item on this list assumes the base figures are correct. A discrepancy here undermines confidence in everything calculated from it, which is why it's typically the first thing a credit analyst checks.
Consistency of add-backs across quarters
Checked by: comparing the add-backs claimed this quarter against those claimed in prior quarters — an add-back that appears, disappears, and reappears without a documented reason is exactly the pattern a credit team is trained to flag.
Why it's scrutinized closely: add-backs are where a calculated ratio is most easily flattered, intentionally or not. A “one-time” item claimed every quarter stops looking one-time fairly quickly, and lenders know it.
Whether reported cash flow matches the bank records
Checked by: comparing cash flow or debt service figures on the calculation schedule against what actually cleared the borrower's bank accounts for the same period.
Why this matters more than it seems: a lender that also holds the borrower's operating accounts has direct visibility into cash movements, which means a reported figure that doesn't match the bank's own records is unusually easy for them to catch — and unusually hard to explain away if it isn't a genuine timing difference.
Shrinking headroom on any covenant
Checked by: comparing each covenant's calculated ratio against its threshold over several consecutive quarters, not just the current period in isolation.
Why the trend matters more than the single result: a covenant that technically passes every quarter but with steadily shrinking margin is a different risk profile than one that passes comfortably and consistently, even though both show “pass” on paper — credit teams are trained to watch the trajectory, not just the current pass/fail result.
Whether the trailing-twelve-month math is right
Checked by: recomputing a trailing-twelve-month figure from the four underlying quarters, where the covenant is tested on that basis, to confirm the reported total actually sums correctly.
Why it's a common source of quiet errors: a trailing calculation depends on four separate quarters being extracted correctly and consistently — a single misapplied add-back or misread figure anywhere in that chain throws off the whole trailing total, often without being obvious from the final number alone.
Timing of debt draws and paydowns
Checked by: comparing the debt balance reported at period-end against known draw and paydown activity on the facility, to confirm the balance used in leverage calculations reflects the actual period-end position.
Why timing specifically gets attention: a debt paydown made just before period-end, followed by a new draw just after, can temporarily flatter a leverage ratio in a way that doesn't reflect the facility's typical usage — a pattern credit teams watch for on facilities with revolving components in particular.
Unexplained changes in accounting method
Checked by: comparing this period's treatment of a given line item — revenue recognition timing, expense capitalization — against how the same item was treated in prior periods.
Why it's worth flagging even when legitimate: a genuine accounting method change can shift reported figures in ways that look, on the surface, like a covenant-relevant trend when it's actually a bookkeeping change — credit teams check for this specifically to separate real performance shifts from presentation shifts.
Related-party transactions inside reported figures
Checked by: reviewing footnotes and management commentary for transactions with affiliated entities — a management fee paid to an owner-affiliated company, a lease with a related landlord — that might inflate expenses in ways relevant to a covenant calculation.
Why it's specifically watched: related-party terms aren't always set at arm's length, which means they can be adjusted in ways that shift reported EBITDA — credit teams check for disclosure of these relationships specifically because they're a known lever.
Whether the certificate matches the credit agreement's actual terms
Checked by: comparing the ratios, definitions and thresholds used on the submitted calculation schedule against the actual, current text of the credit agreement — including any amendments.
Why this catches more than it seems it should: a borrower using last year's calculation template after an amendment changed a threshold or definition produces a certificate that's internally consistent but doesn't match what the agreement currently requires — an easy mistake to make and an easy one for a credit team to catch by comparing against their own copy of the agreement.
Whether the package arrives complete and on time
Checked by: confirming the submission date against the deadline the credit agreement specifies, and confirming every required component — financial statements, calculation schedule, officer's certificate — is actually present.
Why it's checked as strictly as the numbers: many credit agreements treat a late or incomplete submission as its own kind of default, independent of whether the underlying financial performance would have passed every test — a detail that surprises borrowers who assume good numbers are enough on their own.
The eleventh thing: how you respond to a question
Not officially part of the checklist, but very much part of how a finding gets treated: whether the borrower can explain a flagged item immediately with documentation, or needs days to reconstruct what happened. A borrower who responds quickly, with a clear explanation and supporting evidence, is generally treated very differently than one who can't answer at all.
This is the one factor entirely within a borrower's control — the ten checks above describe what gets looked at, but how prepared you are to answer a question about any of them is a choice made well before the review ever happens.
Why lenders check this way
None of these ten checks exist to catch a borrower doing something wrong for its own sake — they exist because a covenant package is, functionally, an early-warning system the lender relies on in place of monitoring every transaction directly. A check that catches an inconsistency early is doing exactly what it's designed to do, for both sides of the relationship.
Understood this way, the checklist isn't adversarial by design — it's the mechanism that lets a lender extend credit without watching every wire transfer, and a borrower that internalizes the same checklist internally is simply doing the same verification work the lender would otherwise have to do from outside.
Turning this into a routine, not a scramble
Every one of these ten checks can be run by a finance team on its own, at any point, without waiting for a lender to request the package. Matching figures to source statements and cross-checking against bank records answers the first several points directly; several others are more about documentation discipline — tracking add-backs, noting accounting changes — built up over time rather than reconstructed once a period.
Finance teams that run this checklist as a routine part of closing each period, rather than as a reaction to an upcoming deadline, describe their actual covenant reviews as largely uneventful — not because the lender's process changed, but because there's nothing left for it to discover.