Enter the current level of financial covenant and the level at which a covenant would be breached to determine the Covenant Headroom.

Covenant Headroom Formula

The following equation is used to calculate the Covenant Headroom.

CH = BL – CL

  • Where Ch is the Covenant Headroom
  • BL is the financial breach level
  • CL is the current financial level

To calculate the Covenant Headroom, subtract the current financial level from the agreed upon breach level.

What is a Covenant Headroom?

Definition:

A Covenant Headroom is a measure of the different between the current level of a position and the limit of a financial position.

How to Calculate Covenant Headroom?

Example Problem:

The following example outlines the steps and information needed to calculate Covenant Headroom.

First, determine the current financial level. For this example, we will look at a trading position of $100,000.00.

Next, determine the trading limit. In this case, the limit is $150,000.00.

Finally, calculate the Covenant Headroom using the formula above:

CH = BL – CL

CH = $150000 – $100000

CH = $50,000.00