ABL Covenant Breach: The Forbearance, Waiver, and Amendment Playbook for Borrowers

Most ABL borrowers will trip a covenant at some point in the life of a facility. That is not a failure of credit underwriting; it is the natural consequence of building tests that have to be tight enough to give the lender protection in a downside. What separates a borrower who comes through clean from one who ends up in workout or restructuring is rarely the breach itself. It is what happens in the first 30 days after the breach is identified.

I have spent five decades inside ABL — including the workout cycles of the early 1990s, 2001, 2008-09, and 2020. I wrote Asset Based Lending Disciplines, the first textbook on the field, and trained more than 5,000 lenders, examiners, and underwriters at GE Capital, JP Morgan Chase, Lloyds, and Barclays. The 2021 SFNet Hall of Fame induction reflected that body of work. The covenant-breach playbook that follows is the one I teach lenders. It is also the one borrowers should be preparing against.

Step 0: Identify the Breach Before the Lender Does

The single most important rule in the entire playbook is this: the borrower should know about the breach before the lender does. A borrower who calls the lender with a clean assessment of the issue, a candid forecast, and a proposed path forward is in a fundamentally different position than a borrower whose lender discovers the breach by reading the next quarterly compliance certificate.

That requires the CFO's office to be running covenant forecasts every month, ideally every week as a test date approaches. The forecast should include the actual ratio, the threshold, the cushion in basis points, the principal driver of any deterioration, and the projected trajectory through the next two test dates. If the projection shows a breach is probable, the conversation with the lender should start at the projection stage, not at the actual-breach stage. The borrowing-base certificate review work covered in our borrowing base certificate reading article applies here too — the discipline of reading what you submit is the discipline of catching the issue early.

The Lender's Response Menu

Once a default exists or is imminent, the lender's response will come from a short list of options. Understanding the menu — and which item the lender is likely to choose — is essential to preparing the right counter-proposal ([ABF Journal, November 2025](https://www.abfjournal.com/dont-panic-five-smart-plays-for-lenders-when-a-borrower-breaches-a-covenant/)).

1. Waiver With Conditions

A waiver formally forgives the specific covenant breach for the specific test date. The credit agreement returns to its pre-default state. Waivers are common for first-time breaches by otherwise performing credits and are almost always conditioned on:

• A waiver or amendment fee — typically 25 to 100 basis points on the commitment, with the lower end for technical or one-time issues and the higher end for breaches that reflect real performance deterioration.
• An increase in pricing — often 25 to 100 basis points on the spread, sometimes only until the borrower demonstrates two or three quarters of compliance.
• Reaffirmation of obligations by guarantors and pledgors, and a full release of any claims the borrower may have against the lender.
• A reservation-of-rights provision making clear the waiver does not extend to any other breach, known or unknown.

The borrower's job at the waiver stage is to keep the conversation about the specific test, the specific period, and the specific cause. A clean, narrowly drawn waiver is the most favorable outcome a borrower can negotiate.

2. Amendment

If the breach reflects something more structural than a one-time miss, the lender will push toward an amendment. Amendments come in several flavors, each with different implications:

• Resetting or suspending the covenant test. The lender suspends one or more upcoming tests, or resets the ratios at lower (more achievable) levels with a step-up to original levels over time. This is borrower-favorable in the near term but typically pairs with other concessions.
• Replacing ratio covenants with performance milestones. Instead of a fixed-charge coverage ratio or leverage ratio, the agreement substitutes minimum EBITDA, minimum revenue, or minimum liquidity floors tested monthly or quarterly. These are easier to monitor and often more aligned with current operating reality. Our springing FCCR article covers how the FCCR is constructed and triggered.
• Expanding the EBITDA add-back basket. Restructuring costs, severance, legal and audit fees, and non-recurring items can be added back, sometimes subject to caps. This improves the calculated ratio without changing the underlying performance.
• Modifying the testing period. Shortening the trailing-twelve-month period to a shorter look-back, or allowing the average of better-performing quarters. This is not common in the market but worth raising in a strong borrower position.
• Tightening the borrowing base. An exchange the lender will often offer: waive the covenant in exchange for tightening eligibility on certain AR or inventory categories — typically narrower cross-aging, lower foreign or in-transit caps, more aggressive concentration limits. We covered the cross-aging and ineligibility math in our eligibility article and the cascade effect in the ineligible calculations walkthrough.
• Additional reporting and monitoring. Weekly or daily borrowing base certificates, 13-week cash flow forecasts, more frequent field exams, monthly management calls.

Amendments are the most common outcome for a real performance breach. The borrower should expect a fee in the 25 to 100 basis-point range, a spread increase, and one or more structural changes. The negotiation is about which changes, not whether there will be any.

3. Forbearance

A forbearance agreement is a different instrument. It does not waive the default. It commits the lender, for a specified period, not to exercise the remedies the default would otherwise permit. The borrower agrees to specific milestones — typically a refinancing target, an asset sale, a capital raise, or a return to compliance by a defined date — and the lender agrees to stand down while the borrower pursues them.

Forbearance is the standard tool when the breach is severe enough that a waiver is not appropriate but the lender is willing to give the borrower a runway to fix it. The agreement will typically include:

• A forbearance fee — usually higher than a waiver fee, sometimes 100 to 250 basis points or a flat dollar amount.
• Default interest on the outstandings during the forbearance period, typically 2 to 4 percentage points above the contract rate ([Cadwalader, Fund Finance Friday](https://www.cadwalader.com/fund-finance-friday/index.php?nid=236)).
• Acknowledgment of defaults by the borrower and a full release of all claims against the lender.
• Specific milestones with completion dates: appointment of a chief restructuring officer, retention of an investment banker for a sale process, delivery of a refinancing term sheet, achievement of a covenant level, payment of a step-down on principal.
• A right of termination if any milestone is missed.
• Sometimes a roll-up of any new-money advances into the protected position, springing cash dominion, lender-controlled cash management, and the appointment of a financial advisor for the lender's account.

Forbearance is the inflection point of the workout cycle. Borrowers who enter forbearance with a credible, time-bound plan execute it. Borrowers who enter forbearance hoping things will turn around without one rarely come out the other side intact.

4. Acceleration and Remedy Enforcement

If the breach is severe and the borrower has not cooperated — or if a forbearance has terminated for missed milestones — the lender's next move is acceleration. The outstanding balance becomes due. Default interest accrues. Cash dominion goes from springing to full (see our cash dominion article). The lender can sweep collections, control disbursements, and ultimately enforce against the collateral.

Acceleration is rare in ABL because the collateral discipline of the structure usually gives both sides a strong incentive to find a workout solution. But it happens, and it is the backstop that gives the lender leverage in every other conversation on this list. The DIP financing path covered in our Chapter 11 DIP article is the next step after acceleration if the borrower files.

What the Borrower Should Bring to the Conversation

The borrower's leverage in any of these conversations is directly proportional to the quality of the package they bring to the meeting. The single biggest mistake we see borrowers make is showing up with explanations instead of analysis. The lender already knows there is a problem. What the lender does not know is what the borrower's plan is.

A credible workout package contains five components:

1. A clean, candid root-cause analysis. What caused the breach? Was it volume, margin, working-capital build, one-time charges, a major customer issue, a cost shock? The analysis should be specific, quantified, and free of euphemism.
2. A 13-week cash flow forecast with weekly granularity, separately identifying operating receipts, operating disbursements, debt service, capital expenditures, and ending cash. The forecast should include a downside case and identify the binding constraint week by week. This is the document the lender's workout team will read first.
3. A revised 12 to 18 month projection showing the path back to covenant compliance. The projection should be defensible — assumptions tied to specific operational actions, not to "market improvement" or "win-back" assumptions that cannot be tested.
4. An updated borrowing base outlook identifying any erosion in eligible collateral and the borrower's plan to maintain availability. Borrowers often overlook this; lenders never do. The work of cleaning up eligibility issues described in our field exam findings article applies directly here.
5. A specific proposal. What is the borrower asking for — a waiver, an amendment, a forbearance, a combination? On what terms? With what concessions? A specific proposal moves the conversation forward; an open-ended "what would you accept" hands the lender the pen and never gets it back.

Three Mistakes That Cost Borrowers the Most

1. Hiding the issue. Lenders find out. Always. The deterioration in the borrowing base certificate, the slowing of collections, the increase in days payable — all of it shows up in the data the lender already has. A borrower who waits to disclose until the lender raises it has surrendered the most valuable asset in the negotiation: credibility.

2. Treating the workout team like the relationship team. When a deal moves from the originating relationship manager to the workout group, the rules change. Workout officers are measured on minimizing loss, not on growing the relationship. They expect documents, milestones, and execution. The borrower's response should match that posture — disciplined, prepared, professional.

3. Trying to refinance out of the breach without telling the incumbent. A borrower in covenant default has a very narrow set of refinancing options. New lenders will see the existing facility's covenants in the data room, will read the most recent compliance certificate, and will price the default risk into their term sheet — if they offer one at all. Borrowers who try to "shop the deal" without engaging the incumbent in parallel discover this the hard way. The right move is to run both tracks transparently: pursue a workout amendment with the incumbent while simultaneously preparing a refinancing package for select alternative lenders. Our refinancing playbook and term-sheet comparison article cover the parallel-track mechanics.

Where Independent Advisory Helps

We are an independent ABL advisor and loan placement consultant. We do not lend, fund, broker, or guarantee facilities. Final credit and funding decisions are always made by the lender. In a covenant-breach situation, our role is to help borrowers prepare for the conversation the lender is about to start — and to help them present a credible plan that influences which option on the menu the lender pulls.

Specifically, we help borrowers prepare the root-cause analysis, build the 13-week cash flow forecast in lender format, structure the 12 to 18 month return-to-compliance projection, clean up the borrowing base outlook, draft the specific waiver/amendment/forbearance proposal, and — when refinancing is the right path — package the deal for introduction to alternative lenders. We do not represent the borrower at the workout table in a legal capacity (that is for borrower's counsel) and we do not negotiate term sheets on the borrower's behalf. We advise on the terms, prepare the borrower for the meetings, and stand alongside the team through the process.

The breadth of work this draws from is unusual. Five decades inside ABL, the textbook, the training of the credit officers and workout officers who staff the major ABL platforms today, and the parallel field-exam practice at ABLC that gives us a continuous read on how lenders are evaluating distressed borrowers right now. For our full positioning, see the services and process pages.

The Bottom Line

A covenant breach is not the end of the credit. It is a moment of choice — for the lender, and for the borrower. The lender will choose from a defined menu. The borrower's job is to influence that choice with preparation, candor, and discipline. The borrowers who do this well preserve their facility, preserve their lender relationship, and — most importantly — preserve the operating runway to fix the underlying business issue. The borrowers who do it poorly find themselves in forbearance with milestones they cannot hit, or worse.

If you are facing a covenant breach, an imminent breach, or a covenant test you expect to be tight, the right time to start preparing is now. We will run a workout-readiness diagnostic and tell you straight what the lender is likely to do — and what package will give you the best chance of the outcome you want.