Financial Distress
Short definition
Financial distress is debt service, covenants or liquidity breaking so the firm is pushed into expensive, constrained, value-destroying decisions. It starts before default; customer, supplier and talent flight can cost more than cash interest.
Detailed explanation
Channels: covenant breach, maturity wall, cash trough, downgrade, margin calls. Distress costs: wider spreads, capex cuts, fire sales, management flight.
Trade-off theory puts this cost against the shield. High rates pull the distress line forward while EBITDA still looks solid.
Why it matters for the CFO
The CFO’s job is to see the covenant and cash moment distress starts, not the default moment. Flexibility still exists then.
How to read it
DSCR < 1, zero covenant headroom, a negative 13-week — any one is distress. All three together are close to default.
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Definitions are educational. They are not investment, credit or tax advice.