What is covenant waiver?

A covenant waiver excuses a particular breach, usually for a single test period, without changing the covenant going forward. The borrower typically requests the waiver, and the lender documents it in writing after review. Waivers differ from amendments, which permanently change covenant terms, and from forbearance agreements, in which the lender agrees to delay enforcing remedies for a period while the default continues.

Lenders grant waivers when the breach appears temporary or immaterial to repayment ability. In exchange, they often charge a fee, increase pricing, require additional collateral or reporting, or tighten other terms. The waiver decision usually requires approval by someone with appropriate lending authority, and it should prompt a review of the risk rating.

Repeated waivers for the same covenant signal that either the borrower's condition has changed or the covenant was poorly set. Waiving breaches without documenting the analysis, failing to reassess the risk rating, or granting waivers informally by email can weaken the lender's legal position, create disputes over what was agreed and draw examiner criticism.