The runway arithmetic
The method needs three numbers per covenant metric: where the metric stands today, how far it moves each month, and where the trigger sits. Project each metric forward on a straight line, value at month n = current + n × monthly Δ, and read off the first month at or past the line. For a cap-type covenant (charge-offs, delinquency), the breach month is ceil((cap − current) ÷ slope). For a floor-type covenant (weighted FICO), it is ceil((current − floor) ÷ |slope|). The ceiling function is not decoration: covenants test at reporting dates, so the first monthly test at or beyond the threshold is the breach month, even if the line is crossed mid-month.
Run that for every trigger in the facility, and the earliest breach month is the runway headline. One number: how many monthly reporting cycles remain before the first covenant conversation stops being hypothetical.
| Quantity | Rule | Convention |
|---|---|---|
| Projected value | value(n) = current + n × Δ/mo | Linear, 18-month horizon |
| Breach month, cap-type | ceil((cap − current) ÷ slope) | Slope ≤ 0 → no breach projected |
| Breach month, floor-type | ceil((current − floor) ÷ |slope|) | Slope ≥ 0 → no breach projected |
| Already at threshold | breach month = 0 | At or past the trigger today |
| Runway | min of all breach months | Earliest breach sets the headline |
The standard bands
Warehouse facilities in subprime auto tend to set triggers inside recognizable ranges: net charge-off caps at 8 to 10 percent, 90-plus-day delinquency caps at 4 to 6 percent, and weighted-FICO floors at 560 to 590. Below the covenant line, the working bands most monitoring frameworks use are tighter still, charge-offs read as comfortable under 4 percent and as a watch item from 4 to 8; delinquency reads as comfortable under 3 and as a watch item from 3 to 5; a weighted FICO under 560 reads as elevated risk, with 560 to 590 the watch zone.
The same runway logic applies to any threshold, not just facility covenants: a CECL or allowance-coverage trigger, a concentration limit, or an internal board risk tolerance. Anything with a current level, a monthly drift, and a line it must not cross has a breach month.
Why the slope, not the snapshot
Two portfolios each report 9.6 percent charge-offs against a 13.5 percent cap. Identical snapshots, identical headroom: 3.9 points. One is drifting up at a tenth of a point per month, 39 months to the line, beyond any forecast worth taking literally. The other is deteriorating at 0.65 points per month, six months to the line. The snapshot cannot tell these two books apart. The slope is the entire signal. That is the same lesson the public record taught in the Tricolor collapse: the level looked survivable right up until the trajectory said otherwise.
The slope framing also reorders which trigger matters. Runway is a race between ratios, headroom divided by slope, not a ranking of headroom. Consider a synthetic baseline book, illustrative only:
| Metric | Today | Slope / mo | Trigger | Breach month |
|---|---|---|---|---|
| NCO rate | 9.30% | +0.18pp | cap 13.50% | M24 · beyond window |
| 90+ DPD | 6.90% | +0.09pp | cap 10.00% | M35 · beyond window |
| Weighted FICO | 578 | −1 pt | floor 570 | M8 · first to break |
A worked example: month six
Take the fast-deteriorating book from above, synthetic and illustrative throughout. Charge-offs stand at 9.6 percent, worsening at 0.65 points per month, against a 13.5 percent cap. Headroom is 3.9 points; 3.9 ÷ 0.65 = 6.0, and the ceiling of 6.0 is 6. The sixth monthly test lands exactly on the cap.
| Month | Projected NCO | Headroom to 13.50% cap |
|---|---|---|
| M0 · today | 9.60% | 3.90pp |
| M1 | 10.25% | 3.25pp |
| M2 | 10.90% | 2.60pp |
| M3 | 11.55% | 1.95pp |
| M4 | 12.20% | 1.30pp |
| M5 | 12.85% | 0.65pp |
| M6 · breach | 13.50% | 0.00pp |
What a tripped trigger actually does
The mechanics matter because they start before the breach month. Most facilities carry intermediate trigger levels short of an event of default, and the first consequence is usually the cash sweep: collections that would ordinarily flow back to the operator as excess spread are instead trapped in the structure and swept to pay down the facility. The operator's own cash flow becomes the cure mechanism. Alongside the sweep come advance-rate step-downs, eligibility exclusions that shrink the borrowing base, and, at the covenant line itself, cure periods measured in days, not quarters.
Sequencing differs by trigger. Delinquency breaches tend to draw the fastest response, because 90-plus-day delinquency is a leading indicator of the charge-offs to come; a charge-off breach confirms what the delinquency tape already said months earlier. And in every case the formal review starts well before month zero of the projection, the lender sees the same slope the operator does, and initiates the conversation on its own schedule.
Limits
This method is a straight line, and portfolios do not move in straight lines. Roll rates compound, so deterioration tends to accelerate late, a linear breach month is usually the optimistic case for a worsening book. Denominators move: rapid origination growth mechanically flattens a charge-off ratio while a shrinking book steepens it, with no change in underlying credit. Seasonality, tax-refund cycles in particular, puts real curvature in monthly delinquency. Covenant definitions vary by document, trailing three-month annualized versus cumulative static-pool measures can put the same portfolio months apart on the same chart. And the arithmetic cannot see the relationship: waivers, amendments, and lender discretion decide what a breach actually costs, and none of that is in the tape. Treat the breach month as a planning number, not a prediction.