Covenant Monitoring

Covenant Monitoring & Breach Investigation

When to Activate

Trigger when user asks: "covenant breach", "covenant compliance", "covenant headroom", "watchlist", "which borrowers are at risk", "equity cure", "waiver", "covenant deep-dive", "credit committee recommendation", "covenant status", "tight covenants", "breach investigation"

Workflow

Step 1: Covenant Breach Detection

Tool: credit_portfolio_analyzer Query: All borrowers with covenant breaches, headroom below 10%, or active waivers. Include leverage covenant, coverage covenant, and any financial maintenance tests.

Present:

• Headline: "[X] borrowers with covenant issues ([Y] in breach, [Z] with tight headroom)"
• Breach summary table:

• Flag any borrowers with headroom below 10% as "TIGHT"
• Note any active waivers or equity cure usage

STOPPING POINT

Present the breach summary, then offer: "I've identified [X] covenant issues across the portfolio. I can:

• Deep-dive a specific borrower (full covenant history, financial trends, leverage trajectory)
• Review cure provisions (credit agreement terms for equity cure, waiver, and amendment)
• Check management commentary (latest compliance certificate narrative and outlook)
• Generate credit committee summary (structured severity assessment with recommended actions)

Which would be most useful?"

Step 2a: Borrower Deep-Dive (if user selects a borrower)

Tool: credit_portfolio_analyzer Query: Full financial history for the selected borrower — quarterly leverage, coverage ratios, revenue, EBITDA trends over 8+ quarters

Present:

• Financial trend table (quarterly)
• Leverage trajectory chart data (is it improving or deteriorating?)
• Key inflection points: "Leverage crossed covenant threshold in Q[X] when EBITDA declined [Y]%"
• Context: sector performance, rate impact on coverage

Step 2b: Cure Provisions (if user chooses cure review)

Tool: search_credit_agreements Query: Credit agreement for the breached borrower — equity cure provisions, waiver terms, amendment procedures, PIK triggers

Present:

• Cure mechanism: "Equity cure available: [Yes/No], max [X] cures in [Y] months, max amount $[Z]M"
• Waiver terms: notice period, lender consent threshold
• Amendment provisions: supermajority requirements, fee structure
• PIK trigger: "PIK activates if leverage exceeds [X]x for [Y] consecutive quarters"

Step 2c: Management Commentary (if user chooses compliance review)

Tool: search_compliance_certs Query: Latest compliance certificate for the flagged borrower — management narrative, outlook, remediation plans

Present:

• Management explanation for covenant pressure
• Remediation plan (if any): cost reduction, asset sales, equity injection
• Forward outlook: management confidence level
• Comparison to prior quarter commentary (improving or worsening narrative)

Step 2d: Credit Committee Summary (if user chooses CC summary)

Synthesise all available data into structured format:

## Covenant Issue: [Borrower]

**Severity**: [Critical / Elevated / Watch] | **Trend**: [Deteriorating / Stable / Improving]

### Breach Summary
| Covenant | Threshold | Actual | Headroom | Quarters in Breach |
|----------|-----------|--------|----------|--------------------|
| [Type] | [X] | [Y] | [Z]% | [N] |

### Root Cause
[FACT] [What financial metrics drove the breach]
[ANALYSIS] [Whether the issue is cyclical or structural]

### Available Remedies
- Equity cure: [Available / Exhausted] ([X] of [Y] used)
- Waiver: [Requested / Not yet requested]
- Amendment: [In discussion / Not applicable]

### Recommended Action
[INFERENCE] [Credit committee recommendation with rationale]

Audience-Specific Presentation

• Credit Committee: Full Step 1 + Step 2d summary for each flagged borrower
• PM/Analyst: Full workflow with stopping point and all branch options
• Client/Investor: Step 1 headline only — "[X] borrowers on watchlist, [Y] under active remediation"

Output Template

## Covenant Monitoring Report

**Portfolio**: [Fund Name] | **As of**: [Date]
**Borrowers in Breach**: [X] | **Tight Headroom (<10%)**: [Y] | **On Watchlist**: [Z]

| Borrower | Covenant | Status | Headroom | Remedy | Severity |
|----------|----------|--------|----------|--------|----------|
| [Name] | [Type] | [Status] | [X]% | [Remedy] | [Severity] |

### Key Concern
[Most critical borrower situation in 2-3 sentences]

### Recommended Actions
1. [Action for highest severity borrower]
2. [Action for next priority]

Stopping Points

• After Step 1 (breach detection): Offer 4 branching options
• After any Step 2 branch: "Would you like to investigate another borrower, or shall I compile the full credit committee report?"