{"id":"fpa-leverage-covenant-headroom","audience":"fpa","category":"finance-work","track":"finance","technique":"verification","level":"advanced","title":"Compute covenant headroom and flag it for counsel to confirm","free":false,"task":"You're preparing a covenant headroom line for the CFO. Write a prompt for plain text with lines starting \"Net debt:\", \"Leverage:\", \"Covenant:\", \"EBITDA floor:\", \"Cushion:\" and \"Confirm:\". Net debt is debt minus cash. The Confirm line says to check the definitions against the credit agreement with counsel before relying on the numbers. Facts only: no view on whether the company is safe. Under 90 words. No bullets or numbering.","materialLabel":"Debt, cash, EBITDA and covenant terms (attached to your prompt automatically)","material":"COVENANT HEADROOM INPUTS - Dec 31, 2026 forecast, Millbrook Foods\n\nTotal debt: $4,500,000\nCash and equivalents: $1,200,000\nTrailing twelve-month EBITDA (management calculation): $1,200,000\n\nCovenant summary (from the finance team's one-page note): maximum net debt to EBITDA of 3.0x, tested quarterly.\n\nNotes: the credit agreement itself isn't in this folder. The one-page note may use a simplified definition of EBITDA that differs from the agreement's (for example, add-backs). The CFO asked 'are we safe?' Facts only, no opinion.\n\nBackground: the term loan was signed in 2024 and is tested at each quarter end. The Q3 test (reported to the lender in October) showed 2.9x using management's EBITDA. Cash at Dec 31 is a forecast, not a bank balance. Capital spending of $300,000 planned for December is not in the cash figure above.","rules":[{"type":"plainText"},{"type":"maxWords","max":90},{"type":"maxBullets","max":0}],"promptHints":[{"label":"Names the six lines","patterns":["net debt","leverage","covenant","ebitda floor","cushion","confirm"]},{"label":"Gives formulas","patterns":["net debt / ebitda","/ 3\\.0"]},{"label":"Adds the counsel check","patterns":["counsel","credit agreement"]},{"label":"Bans safety opinion","patterns":["(do not|don'?t).*(safe|opinion)","facts only"]},{"label":"Caps length","patterns":["\\d+\\s*words","plain"]}],"mistakes":[{"title":"Using gross debt","why":"The AI divides $4,500,000 by EBITDA and gets 3.75x.","fix":"Add: \"Net debt = debt minus cash.\"","checks":["r0"]},{"title":"Answering 'are we safe?'","why":"The AI says the company has comfortable headroom.","fix":"Add: \"Facts only: do not say whether the company is safe.\"","checks":["r2"]},{"title":"Skipping the definition check","why":"The AI treats the one-page note as the agreement.","fix":"Add: 'A \"Confirm:\" line: check definitions with counsel.'","checks":["r2"]},{"title":"Markdown extras","why":"The AI adds bold labels, headings and a closing note.","fix":"Say: \"Plain text, no bold. Output only the lines asked for.\"","checks":["plainText","maxBullets","r1"]},{"title":"Trusting the AI to count words","why":"AI is bad at counting and runs past word limits.","fix":"Ask for fewer words than the real cap and keep each line short.","checks":["maxWords"]}],"hint":"Covenants have legal definitions. Compute the numbers, but ask for a counsel check and ban safety opinions.","rubricLabels":["The line starting \"Net debt:\" shows $4,500,000 - $1,200,000 = $3,300,000 and the line starting \"Leverage:\" shows $3,300,000 / $1,200,000 = 2.75x","The line starting \"Covenant:\" shows maximum 3.0x and the line starting \"EBITDA floor:\" shows $3,300,000 / 3.0 = $1,100,000, with \"Cushion:\" showing $1,200,000 - $1,100,000 = $100,000 (about 8.3%)","The line starting \"Confirm:\" says to check the definitions against the credit agreement with counsel, and no line says the company is or isn't safe"]}