The covenant menu: every NAV loan covenant in plain English
Every covenant in a NAV loan answers one of five questions. Here is the menu, what each item means, and the ranges we see in practice.
Last reviewed November 2026.
Borrowers tend to meet covenants one at a time, in a term sheet, under pressure, with a lawyer explaining each as it comes up. That is the wrong way round. There are only about ten covenants that appear in NAV loans, and every one of them exists to answer one of five questions. Once you know the questions, the menu is short and the negotiation is about which items are on it and at what level.
This note sets out the menu as we see it across the facilities we structure and the facilities we review from other lenders: what each covenant means, why a lender asks for it, and the range of levels that appear in practice. The figures are ranges drawn from a number of transactions and are not the terms of any one facility. Every NAV loan is custom and the levels on yours will depend on the portfolio.
The five questions
Every covenant answers one of these:
Is there enough value behind the loan?
Is that value spread across enough assets?
Can anyone get ahead of the lender?
Can cash leave before the lender is repaid?
If things go well, does the lender still earn a minimum return?
Questions one to four are covenants. Question five is answered by the economic terms that sit alongside them, which are covered at the end.
The menu
1. Value cover, also called LTV or NAV coverage
What it means. The portfolio must stay worth a set multiple of the loan. The same test can be written either way round: three times cover is a 33% loan-to-value limit, four times cover is 25%.
Where it is set. Between about 2.75 times and 6.7 times cover, which is a loan-to-value limit of roughly 15% to 36%. The limit nearly always sits a cushion above the opening level, so that an ordinary markdown does not trip it on day one. Typical pairings are an opening loan-to-value in the high twenties against a limit in the mid thirties, or an opening level under 10% against a limit of 25%. The size of the cushion is the single most negotiated number in the document.
Why it exists. It is the lender’s answer to question one. Everything else is detail.
2. Concentration cap
What it means. When the value cover test is run, any one asset can only count for so much of the total. A portfolio of ten positions where one is half the value is treated, for covenant purposes, as if that position were smaller.
Where it is set. A single asset capped at anywhere from 10% of counted value, for a diversified book of fund interests, to 65% or 75% where the portfolio is already concentrated and the lender has priced for it.
Why it exists. Question two. A loan covered three times by one company is covered once by three companies and the lender would rather have the second.
3. The “big assets cover the loan” test
What it means. On top of the overall cover test, the loan must be covered by a small number of assets taken individually, so that repayment does not depend on the whole portfolio performing.
Where it is set. Common forms are: the two largest assets each worth at least the loan; the three largest each worth at least the loan; or the largest worth twice the loan and the next ten together worth it once.
Why it exists. Question two again, from a different angle. The overall cover test can be satisfied by a long tail of small positions that would be slow to sell. This test asks whether the lender could be repaid from the top of the book alone.
4. Minimum number of assets
What it means. The portfolio cannot shrink to a handful of holdings through sales or write-offs while the loan is outstanding.
Where it is set. For a fund-of-funds style book, at least 25 positions each worth $1m or more. For a concentrated direct portfolio, three of the four pledged assets each worth $20m or more.
Why it exists. Question two. The lender underwrote a portfolio and wants to keep one.
5. Cash flow floor
What it means. Where the pledged assets are operating companies rather than fund interests, they must keep earning. The test is usually on EBITDA.
Where it is set. A combined EBITDA floor for the pledged companies (for example $50m a year across the group), sometimes with a second test that at least two companies individually earn above a threshold.
Why it exists. Question one, measured on earnings rather than valuation, because valuation of a private company lags and earnings do not.
6. Owner liquidity and net worth
What it means. Where a principal gives a personal guarantee, which is the exception rather than the rule, the principal must stay liquid and solvent enough for the guarantee to mean something.
Where it is set. Minimum personal cash in the low tens of millions of dollars, and occasionally a minimum net worth in the hundreds of millions where the guarantee is central to the credit.
Why it exists. A guarantee from someone who cannot pay is not security. We would add that most NAV loans to holding companies carry no personal guarantee at all, and that this covenant appears only when one does.
7. Limits on other debt
What it means. Nobody can add borrowing that ranks ahead of the NAV loan or sits alongside it on the same assets.
Where it is set. Debt on underlying properties capped at its balance on the closing date. No new debt or security at portfolio companies without consent. Where a bank facility already ranks ahead, a cap on its size and often a right for the NAV lender to buy it out.
Why it exists. Question three. The lender’s cover is measured on value net of anything senior to it; new senior debt reduces cover without any change in the portfolio.
8. Leakage limits
What it means. Cash cannot flow out to the owner or investors beyond an agreed amount while the loan is outstanding.
Where it is set. A fixed allowance for running costs and agreed payments, sized to the portfolio (on a multi-billion dollar portfolio the allowance can run to nine figures; on a $100m book it is a fraction of that). Limits on redemptions from the pledged vehicles. Restrictions on selling the largest assets without applying proceeds to the loan.
Why it exists. Question four. Value that leaves the structure is value the lender cannot look to.
9. Cash sweep
What it means. When an asset is sold or distributes, the lender takes some or all of the proceeds in repayment. We covered the waterfall in detail in our DC Finance webinar write-up; the short version is that the sweep is the rule deciding how much of each distribution goes to the lender and how much is released.
Where it is set. A common shape is a partial sweep in the early period, for example two thirds of the first tranche of sale proceeds in year one, moving to a full sweep thereafter until the loan is repaid. Sweep holidays, where nothing is swept for the first 12 to 24 months regardless of loan-to-value, are negotiable where distributions are expected early.
Why it exists. Question four, and also question one: a sweep reduces the loan as the collateral is realised, so cover is maintained.
10. Draw stop
What it means. If value falls sharply, any undrawn part of the facility is cancelled. The borrower keeps what has been drawn and loses the option on the rest.
Where it is set. Undrawn commitments cancelled if portfolio value falls by more than half from closing.
Why it exists. A delayed-draw facility is a promise to lend more into a portfolio that may have changed. The draw stop limits that promise to the portfolio the lender underwrote.
The economic protections that sit alongside
These are not covenants. They appear in almost every facility and they matter as much to the borrower, because they decide what the loan costs if it is repaid early or goes well.
Minimum return. The lender earns at least 1.125 times to 1.25 times its money even if repaid early. Some facilities use a make-whole instead, typically 15 to 18 months of interest. Either way, a borrower who expects to repay inside a year should price that in before signing.
Fees. Upfront fees of around 0.6% to 2.5% of the facility, and sometimes an exit fee of 0.5%.
Pricing that steps up with risk. The margin rises as loan-to-value rises, through a grid. On the widest grids the step from the lowest to the highest band can be as much as 2.5 percentage points. Our note on what pricing on a grid means covers the mechanics.
Default rate. An additional 3% to 4% of interest while a default is continuing.
Extension option. One further year, usually for an additional 0.5% fee.
Upside share. Rare, and seen mainly on venture portfolios where the lender has taken more risk: a share of distributions after repayment, for example a third, until the lender reaches a target such as 15% a year or 1.5 times its money.
How to use the menu
Three practical points.
First, count the covenants in any term sheet against this list. A facility with items 1, 2, 7, 8 and 9 is a normal NAV loan. A facility with all ten, or with item 6 on a portfolio that does not need a guarantee, is a lender covering itself for a portfolio it does not fully understand, and the right response is to ask which concern each covenant addresses.
Second, negotiate the levels, not the existence. Lenders rarely drop value cover or the debt limits, because those are the loan. They will often move the cushion between opening and limit, the concentration cap, the sweep percentage and the sweep holiday, because those are judgement calls about the specific portfolio.
Third, model the economics alongside the covenants. A facility with light covenants and a 1.25 times minimum return can cost more than one with tighter covenants and no minimum, if the plan is to repay within eighteen months.
If you have a term sheet in front of you and want a second opinion on where its levels sit against the ranges above, send it over. We will tell you which items are standard, which are negotiable, and which deserve a question.
General information, not advice. Nodem Capital is an FCA-authorised AIFM (fund manager). Nodem Ltd is authorised and regulated by the Financial Conduct Authority, FRN 1017481.
