Banking covenants (Switzerland) are contractual commitments included in Swiss bank loan agreements requiring the borrower to maintain certain financial ratios or respect specific operational constraints throughout the life of the loan. Common covenants include leverage ratios (net debt / EBITDA), interest coverage ratios (EBITDA / financial charges), minimum equity levels and restrictions on dividend distributions or additional indebtedness. In financial due diligence, the review of existing covenants and headroom analysis is essential: a breach of covenant can trigger immediate loan acceleration and threaten the company's financial stability, directly affecting its value.

‍

Example: a Swiss industrial SME has a CHF 8.0 million term loan with a leverage covenant of net debt / EBITDA ≤ 3.5x. At the time of the due diligence, the normalised ratio stands at 3.1x — providing CHF 1.1 million of covenant headroom. The buyer models covenant compliance under the post-acquisition business plan, identifying a risk of breach in year 2 if EBITDA underperforms by 15%, and negotiates a covenant waiver as a closing condition.

‍

Hectelion systematically reviews covenant headroom in every financial due diligence, as covenant breaches represent a material contingent risk in acquisitions.