Note to Clients: Avoiding Default Doesn’t Mean Avoiding Limitations

The financial challenges of the past year have put some organizations at risk of breaching covenants on their outstanding debt obligations. But even if a default is avoided, organizations might still run up against limitations imposed by the Master Trust Indenture (MTI) or other bank covenants.

For example, the MTI might provide that failure to meet a Debt Service Coverage ratio constitutes a default only if that failure occurs over two consecutive years. But it may also impose limitations once failure occurs in Year One. These limitations could include:

  • A consultant call-in requirement to identify opportunities to increase Debt Service Coverage
  • Limitations on additional borrowing unless the organization can demonstrate its ability to meet certain thresholds for Maximum Annual Debt Service (MADS) or Debt Service Coverage
  • Limitations on the ability to merge, absent a demonstration that the merger will allow the organization to avoid default
  • Limitations on the lease, sale, or disposition of property, again unless the organization can demonstrate it will meet specified thresholds for MADS or Debt Service Coverage

Our advice is to be proactive in arranging for an early consultant call-in if it appears that these limitations might be triggered. An early call-in will help the consultant be ready if a full report is required and may help identify opportunities that will help the organization avoid triggering any limitations in the MTI or other covenants.

Please reach out to Robert Turner at with any questions.

You can also read Robert’s recent article on covenant management in the April issue of HFMA’s hfm magazine.