Definition
Covenant headroom is the buffer between actual financial metrics and covenant thresholds in a debt agreement.
Formula
Headroom = covenant threshold - actual metric
Example
If leverage covenant is 4.0x and actual is 3.2x, headroom is 0.8x.
How to use it
- Track headroom monthly to avoid surprise defaults.
- Model downside cases to ensure buffers remain positive.
Common mistakes
- Relying on trailing data when forward-looking forecasts are weaker.
- Ignoring cure rights or waivers when assessing near-term risk.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Covenant Headroom" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Loan amortization: how monthly payments and total interest work) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- WACC Calculator: Calculate WACC (Weighted Average Cost of Capital) from capital structure, cost of equity, cost of debt, and tax rate.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- Pre-money vs Post-money Valuation Calculator: Convert between pre-money and post-money valuation and estimate investor ownership from a financing round size.
- Pro Rata Investment Calculator: Estimate how much you need to invest in a new round to maintain your ownership percentage (simplified).
- Option Pool Shuffle Calculator: Estimate founder dilution impact when the option pool is increased to a target percent of post-money (simplified).
Guides
- Loan amortization: how monthly payments and total interest work: A practical guide to loan amortization: monthly payment formula, why interest dominates early, and how term and rate affect total interest.