Covenant Review in Diligence: Reading the Debt Before You Own It

Existing debt in an acquisition target isn't just a line item to be refinanced away — it's an active constraint system governing what the business can and cannot do between signing and close. This episode of HoldCo makes the case that covenant review belongs at the front of diligence, not the back, and walks through a practical framework for how buy-side teams should move through credit agreements, indentures, and intercreditor arrangements before surprises turn into emergency waiver calls. Here's what the episode covers: Why timing is everything: Pulling debt documents in the first week — not the final stretch — gives teams the runway to actually resolve problems rather than negotiate around them under seller leverage. Building a document map first: Before parsing operative provisions, inventorying each instrument (parties, maturity, agent bank) forces genuine understanding of the capital structure rather than reliance on CIM summaries. Financial maintenance covenants: How to run your own covenant EBITDA calculation using the credit agreement's definitions — not the income statement — and why the difference between those two numbers can be the difference between comfort and crisis. Incurrence covenants and deal structure collisions: Mapping ratio-based, fixed-dollar, and general baskets to understand whether the buyer's financing plan is actually permitted under the existing documents. Restricted payments as a cascading risk: How a near-miss on a maintenance covenant can trigger a default that blocks the cash flows a holdco depends on to service acquisition debt — a structural failure hiding in plain sight. Cross-default and MAC definitions: Why the default definitions in a credit agreement often differ materially from the MAC definition in the purchase agreement, and why both need to be read on their own terms. The episode closes with a format recommendation: a one-page covenant summary matrix that maps each restriction against the current position, the deal structure's requirements, and any gap requiring resolution — the kind of structured output that the virtual data room is built to support, keeping documents organized so that relevant provisions can be found, compared, and tracked without the team re-reading the same agreement from scratch every time a new workstream needs a section. Teams doing this kind of multi-document financial analysis can also benefit from cross-document reconciliation to surface conflicts between covenant definitions across instruments, and from flagging exposures directly into the AI risk register so nothing slips out of the diligence record before close. For more on avoiding the structural mistakes that compound during acquisitions, listen to 10 Pitfalls That Can Derail a Business Acquisition — And How to Dodge Them. More from HoldCo at the link below. VDR.ai