How does IFRS 16 affect covenants and debt clauses?

Answer

Mechanics

IFRS 16 triggered a wave of covenant renegotiations in 2019. Standard effects on key covenants:

Covenant	Effect	Risk
Net debt / EBITDA	Net debt rises by the lease liability; EBITDA rises by the operating-lease expense. Net effect is usually a higher ratio.	Covenant breach without economic deterioration
Equity ratio	Balance-sheet total rises because of the RoU asset; equity is broadly unchanged.	Lower equity ratio
Interest coverage (EBIT / interest)	Interest expense rises by lease interest; EBIT rises only by the D&A differential.	Coverage ratio usually falls

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Contractual response

Frozen GAAP clause: Covenants are measured using pre-IFRS-16 accounting, or lease liabilities are explicitly excluded.
Loans and private placements: often renegotiated after 2019.
HGB reporters: HGB remains the main bank-reporting basis for many German middle-market borrowers, so IFRS 16 is often relevant only at group-reporting level.

Pitch tip

In LBO pitches, check the covenant definition explicitly. For IFRS targets, definitions often use a pre-IFRS-16 basis or lease-adjusted logic. Lenders still incorporate the lease burden in free-cash-flow underwriting.

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