LearnGrokNothing here is financial advice, and none of it replaces your own checks.
Draft the memo from a controlled evidence pack, not from a prior-period template. This workflow gives treasury managers, corporate finance leads and controllers a calculation trail, stated headroom and a clear list of matters for lender discussion.
Nothing here is financial advice, and none of it replaces your own checks. Use the final memo as a work product for review by the people authorised to interpret the facility agreement and communicate with the lender.
Key point
Start with the executed terms
The facility agreement and any signed amendment determine the test, not the wording used in an old compliance certificate.
1. Build the reporting evidence pack
Create one dated working folder for the reporting period. Save read-only copies where your document controls allow it. Include:
- The executed facility agreement, plus every waiver, amendment, accession letter and side letter relevant to the borrower group.
- The latest financial statements or management accounts used for the test.
- The trial balance, consolidation file and financial reporting bridge.
- The covenant calculation workbook and supporting schedules for debt, cash, EBITDA, interest and any other defined measures.
- The previous compliance memo and certificate, marked as reference only.
- Board-approved forecasts where the agreement requires a forward-looking test.
- Correspondence confirming prior lender consents, waivers or agreed interpretations.
Record the reporting date, test date, delivery deadline, borrower, guarantors and facility agent in a cover sheet. Identify whether the test is quarterly, half-yearly, annual or triggered by another event.
Watch out
Do not assume the accounting perimeter is the covenant perimeter
The entities consolidated in statutory accounts may differ from the entities included in the borrower group or restricted group.
2. Extract the operative covenant terms
Read the definitions and covenant clauses together. Copy the relevant wording into a terms register, with the agreement clause and page reference beside each item. Do not paraphrase until you have captured the source text.
For each covenant, record:
| Field | Record in the terms register |
|---|---|
| Test | Ratio, minimum amount, maximum amount or other condition |
| Threshold | The required level and whether it changes by period |
| Numerator and denominator | Each defined component, including inclusions and exclusions |
| Period | Measurement period, such as a trailing period or balance-sheet date |
| Elections and adjustments | Permitted add-backs, pro forma treatment, caps and conditions |
| Delivery requirement | Certificate, financial statements, officer signatory and deadline |
Pay particular attention to definitions of Financial Indebtedness, Cash, EBITDA, Finance Charges, Material Subsidiary, Permitted Acquisition and Restricted Group, if used. Note any materiality threshold, currency conversion rule, accounting-policy freeze or requirement to notify the lender of a breach.
If wording is unclear, write the issue in the register as a question. Do not resolve it by selecting the result that produces more headroom.
3. Reperform each calculation from source records
Use a calculation workbook with a separate tab for each covenant. Preserve formulas and show inputs clearly. A reviewer should be able to trace every line from the memo to the workbook, then to a schedule, ledger account or approved financial statement.
Work in this order:
- Map each defined term to its source schedule.
- Reconcile the starting figures to the financial statements or management accounts.
- List each adjustment separately, with its contractual basis and evidence reference.
- Apply caps, thresholds and currency conversion provisions.
- Calculate the covenant result and headroom.
- Compare the result with the prior testing period, explaining material movements.
For a leverage ratio, show the defined debt amount, the defined earnings amount, the resulting ratio and the maximum permitted ratio. For a minimum liquidity test, show eligible cash, any excluded balances and the minimum required amount. State units consistently, for example £m, and identify the exchange rate and date where conversion is relevant.
Check
A calculation is reviewable when it can be traced both ways
You can trace a memo number back to a source document, and a material schedule balance forward into the memo.
4. Test exceptions and delivery conditions
Assess more than the numerical threshold. The agreement may require notices or certificates even where the ratio passes.
Check for:
- A breach, near-breach or forecast breach.
- A missed reporting deadline or missing officer certificate.
- An event that may require notification, such as litigation, disposal, acquisition, change in control or cross-default.
- Reliance on a waiver, consent or interpretation that has an expiry date or conditions.
- A calculation adjustment without adequate evidence.
- A change in accounting policy, reporting perimeter or currency treatment.
For each item, state whether it is confirmed, unresolved or requires lender discussion. Use neutral language. Do not state that a waiver is effective unless the signed document supports that conclusion.
5. Draft the memo in lender-facing order
Keep the memo short enough to review, but include enough evidence for the calculation to be understood. Use this structure:
- Purpose and period: identify the facility, borrower group, testing date and documents reviewed.
- Conclusion: state the calculated position for each covenant and whether it meets the stated threshold, subject to listed qualifications.
- Calculation summary: use a table for the covenant result, threshold and headroom.
- Method and evidence: explain key definitions, adjustments and schedule references.
- Exceptions and lender discussion: list open matters, requested consents or notifications separately from the calculation.
- Approvals and attachments: name the internal review route and attach the calculation workbook, schedules and draft certificate where required.
Do not describe an item as “compliant” if an unresolved interpretation could change the result. Instead state the calculation under the specified assumption, then put the assumption in the exceptions section.
6. Check the output before handover
The output is likely wrong when a ratio in the memo does not match the workbook, when units differ between tables, or when a rounded number appears to create more headroom than the unrounded calculation. It is also wrong when the memo quotes a threshold without its effective date, omits a permitted-adjustment cap, or treats cash as eligible without checking the definition and restrictions.
Run a final review against this table:
| If you see this | Do this |
|---|---|
| Headroom is small | Recalculate using unrounded figures and escalate for independent review |
| An adjustment lacks evidence | Remove it or mark it unresolved pending support |
| Terms differ from the prior memo | Update the terms register and explain the change |
| A waiver is mentioned | Check the signed wording, dates, conditions and scope |
Stop
Do not send a draft memo as a compliance certificate
The certificate, signatory authority and delivery process may have separate requirements under the facility documents.
7. Hand over a controlled pack
Send the draft memo, calculation workbook, terms register and source-schedule index to the designated internal reviewer. Ask for specific decisions on unresolved interpretations, exceptions and proposed lender communications. Record who approved the final wording, the date of approval and the version sent.
Keep the final signed or approved memo, certificate and evidence pack together. This makes the next testing period faster and provides an audit trail if the lender challenges an input.
If the workflow does not work because terms are missing, calculations cannot be reconciled or an exception remains unresolved, stop the submission process. Escalate to the facility owner and the appropriate qualified advisers. Check the current product documentation at xAI documentation if you are using the model to organise source material, as available features are version-dependent.
