The First 48 Hours After a Covenant Warning: A Director’s Playbook
Photo: Scottish Government, OGL 3, via Wikimedia Commons
The call rarely comes at a convenient moment. A relationship manager asks for a short conversation, then explains that the bank has concerns about covenant headroom, a reporting deadline or the direction of the facility. Nothing may have been formally breached yet. But the tone has changed, and the board needs to respond as a board rather than as a collection of worried individuals.
For UK SME and mid-market companies, the first 48 hours after such a warning are disproportionately important. They set the record, shape the bank’s view of management and determine whether the company enters a constructive dialogue or a defensive one. The aim is not to produce a perfect answer immediately. It is to establish control, facts and credibility.
Hour zero: verify the warning and preserve the record
Before reacting, establish what has actually been said. Is this a formal notice, a precautionary call, a request for information or an invitation to discuss a waiver? Ask for the bank’s concerns in writing and confirm the relevant facility agreement clauses, covenant test dates and reporting obligations. Do not rely on a verbal summary passed through several people. The director responsible should keep a dated note of the call, including who said what and what was requested.
At the same time, avoid the temptation to issue a reassuring interpretation to staff or suppliers. The board does not yet know enough. A short internal holding position is usually wiser than a confident narrative that may later need to be corrected.
Assemble a small response group
The full board does not need to manage every detail, but it does need to remain properly informed. A small response group should normally include the chair or lead director, the chief executive, the finance director and appropriate legal or insolvency advice. The group’s purpose is to gather facts, prepare the bank conversation and recommend decisions to the board. It should have a clear convenor and a single point of contact with the lender. Multiple directors calling the bank with different messages is a common and damaging mistake.
Confidentiality also matters. Information about covenant stress is price-sensitive for some companies and sensitive for all. The response group should agree what can be shared, with whom and on what basis. Employees, customers and suppliers should hear from the company only when there is a considered position.
Build the facts before building the argument
Within the first day, the finance team should prepare a concise factual pack: the covenant calculation, the latest management accounts, a short cash-flow forecast and a list of assumptions. A 13-week cash-flow view is often more useful to a lender than a long strategic paper. The board should also identify contingent actions that could improve liquidity or headroom, but it should not present them as commitments until they have been tested.
Directors should ask whether any other obligations are affected. Cross-default clauses, reporting covenants, supplier credit terms and customer contracts may all respond to the same pressure. The response group should map the network of obligations rather than treating the bank call in isolation.
Tell the board properly
The board should be convened or briefed promptly, with a clear summary of the warning, the known facts, the unknown facts and the proposed response. Minutes should record the questions asked, the information reviewed and the decisions taken. If a director has a conflict of interest, it should be declared and managed. The board should also consider whether the company’s auditors, insurers or other advisers need to be informed, depending on the terms of the facility and the seriousness of the position.
This is not a moment for heroic optimism. Directors should be candid about what they do not yet know. A board that records uncertainty and a plan to resolve it is more credible than one that records false certainty.
Prepare the bank conversation
Before speaking to the lender, agree the purpose of the conversation: to understand the bank’s position, share verified information and agree next steps. The company’s representative should be prepared to acknowledge the issue without conceding liability or making promises the board cannot keep. Useful questions include what information the bank needs, by when, and whether it is open to a short standstill or waiver while the company prepares a fuller response.
A written follow-up after the call should confirm the bank’s concerns, the information requested and the date of the next discussion. This is not adversarial. It is simply good governance. Banks respond better to a company that is organised, transparent and realistic than to one that alternates between silence and reassurance.
Mistakes to avoid in the first 48 hours
Several errors are common and avoidable. Do not hide the warning from the board or delay briefing directors who need to know. Do not let several people negotiate informally with the bank. Do not sign personal guarantees, facility amendments or standstill letters without proper advice. Do not make redundant staff or dispose of assets in haste without understanding the legal and operational consequences. Do not promise a recovery plan that depends on unverified assumptions. And do not treat the warning as a purely financial matter; it is also a governance matter, with duties that may become more demanding if the company’s financial position deteriorates.
Close the first 48 hours with a written position
By the end of the second day, the board should be able to point to a short record: the warning received, the facts established, the advisers engaged, the board decisions taken and the next communication with the lender. That record does not solve the problem. It does something more limited and more useful: it shows that the directors have taken control of the process.
Covenant stress is rarely resolved in 48 hours. But the conduct of those two days often determines whether the company earns the time and goodwill needed to resolve it. For UK directors, the discipline is straightforward: verify before reacting, inform before speculating, document before promising and negotiate through one clear voice.
This article is general guidance for directors and is not a substitute for legal, insolvency or financial advice tailored to the company’s circumstances.
