NAV or Net Worth decline covenants (“NAV Covenants”) serve as a warning of material credit deterioration, and a breach of the threshold can result in a default or termination right under the agreement.
NAV or Net Worth decline covenants (“NAV Covenants”) serve as a warning of material credit deterioration, and a breach of the threshold can result in a default or termination right under the agreement. Firms that manage them proactively, with transparency toward counterparties, tend to preserve the relationship and their terms after a threshold is breached and a default is triggered. Below are the steps to get there.
Step 1: Confirm whether a breach has actually occurred
Recalculate the NAV Covenant using the contractual base before assuming the worst. That means checking:
How is NAV contractually defined — Net Asset Value or Net Worth, and specifically using US GAAP, or subject to a party's discretion
The start and end dates of the relevant measurement period, accounting for business day conventions
The timing of cure periods and notice requirements
Cross-default implications to other agreements
Real-time NAV tracking matters most here. Check the NAV Covenant before the contractual reporting date, so that you determine whether there is a breach before your counterparty does.
Step 2: Get ahead of the counterparty
If you have determined that there is a NAV Covenant breach, providing the counterparty with a clear explanation and a proposed path forward can result in a more favorable outcome than a breach the counterparty finds first. It signals control.
Step 3: Negotiate the waiver and reset
The NAV Covenant breach should be handled through a written amendment and should include both a waiver and a reset where possible. The amendment should cover:
Waiver scope — which specific NAV Covenants have been breached, including the measurement periods impacted
Reset terms — new NAV Covenant thresholds against which future covenants will be measured
Cross-agreement impact —all agreements with the counterparty (or affiliates) impacted by the NAV Covenant breach, and that the relevant contracting entities to those agreements are also signatories to the amendment
Step 4: Update the record
The amendment needs to live somewhere accessible — not in an inbox. A centralized record of current terms, updated from the original signing terms, allows you to test the NAV Covenants in the next measurement periods.
Considerations for the Future: Using Side Pockets to Separate Certain Assets from NAV-Decline Coverage
A firm that holds private securities as part of its broader portfolio often does not borrow against those private securities — but that alone doesn't guarantee those holdings are excluded from a NAV Covenant. What counts toward NAV isn't a fixed rule; it's a negotiated point.
Firms with both public and private securities may want to separate the private securities into a side pocket, thereby excluding them from the NAV Covenant entirely. Firms revisiting existing agreements — or negotiating new ones — should consider treating this as a drafting priority, raising the exclusion of private securities early in negotiations rather than after a decline has already occurred.
Term-tracking systems can calculate, monitor and test the NAV Covenant level, but do not address what should be included in the NAV amount.
The Quadrangle Advantage
QDS, our AI-powered CLM system, tracks NAV Covenants across every agreement and the measurement periods including monthly, quarterly, and annual thresholds alike — with the exact measurement scope and covered assets behind each one clearly documented and easy to view.
For firms that want to go a step further, QDS's NAV Tracking Tool syncs directly with fund administrator data to monitor NAV Covenants in real time, so a valuation trend is visible long before it becomes a measurement-date surprise.
Key advantages include:
Centralized NAV Covenant tracking across every agreement, with AI-powered term-by-term detail on what's included and excluded from each calculation
Real-time alerts as NAV approaches a covenant trigger level, before it becomes a breach
Fund administrator sync through QDS's NAV Tracking Tool, keeping monitoring current without manual reconciliation
Integrated amendment and waiver management, so the current terms — not just the original signing terms — are always the ones your team is working from
Cross-team visibility, giving legal, compliance, and investment teams a single source of truth on covenant status
With QDS, firms can catch a NAV Covenant trend early, negotiate from a position of clarity, and keep their documentation current no matter how the portfolio moves.
