AmCham Slovakia

A company can make its loan payments on time while breaching the financial covenants in its loan agreement. Comparing financing options therefore requires an assessment of both total borrowing costs and covenant headroom. A stress scenario shows how that headroom changes when cash flow falls or interest rates rise.

According to the National Bank of Slovakia (NBS), the average interest rate on new loans of more than €1 million to non-financial corporations was 4.51% in August 2026. The figure covers euro-denominated loans with a floating rate or an initial rate fixation period of up to one year. The average was 99 basis points higher than January’s 3.52%. Changes in the mix of new business also influence the average, so its movement does not measure the rate change experienced by an individual borrower. ^[1]

The AAR and NDER measures used in ECB interest rate statistics exclude loan fees. Comparing specific offers requires a calculation based on net loan proceeds and all loan-related payments, including their timing. ^[2]

Total borrowing costs for equal net proceeds

The model compares two five-year loans, each providing net proceeds of €5 million. Both are repaid in five equal annual principal installments. Loan A carries a floating rate, assumed to remain at 4.50% per annum in the base case, and a 1% upfront fee. Loan B carries a fixed rate of 4.90% and a 0.25% fee. These rates and fees are illustrative assumptions, not actual bank offers.

To receive €5 million after deduction of the upfront fee, the company must draw approximately €5.051 million under Loan A and €5.013 million under Loan B. Because the fee is financed through the loan, that portion of the principal also accrues interest. Interest is calculated on the opening principal balance for each year and is payable alongside the principal installment at year-end.

Source: model calculations assuming unchanged interest rates. The annual borrowing cost is calculated using the internal rate of return (IRR) method, based on net proceeds and five annual payments. The model excludes taxes, other fees, collateral-related costs and early repayment costs.

After accounting for upfront fees, the difference in annual borrowing costs is approximately 0.12 percentage points, compared with the 0.40 percentage point difference in interest rates. Loan A remains cheaper if its rate is unchanged. Total savings on interest and fees over the five-year term are approximately €17,000.

If the rate on Loan A rises by one percentage point from the start of year two and remains at that level until maturity, total interest and the upfront fee reach approximately €833,000. A one percentage point decrease under the same conditions reduces the total to €631,000. The corresponding cost of Loan B remains €749,000. The impact of a rate change depends on when it occurs and the principal outstanding at that time.

Cash flow and debt service coverage

The ECB’s Survey on the Access to Finance of Enterprises (SAFE) for the second quarter of 2026 reported a net balance of responses on bank loan availability of −1% in the euro area and +5% in Slovakia. This is the difference between the share of companies reporting improved availability and the share reporting a deterioration. It is not a loan approval rate, and the Slovak result does not support a claim of a broad-based deterioration in loan availability. ^[3]

When assessing a company’s creditworthiness, the European Banking Authority’s guidelines emphasize realistic and sustainable future cash flows. Collateral should generally serve as a secondary source of repayment. Loans intended to be repaid through the sale of pledged assets are assessed separately. ^[4]

Neither accounting profit nor EBITDA alone measures the funds available to service debt. Higher receivables, inventories or capital expenditure can reduce those funds even when revenue is growing. Repayment capacity can be assessed using cash flow available for debt service (CFADS). In this model, CFADS represents funds remaining after funding operations, including working capital requirements, and paying taxes and necessary capital expenditure, but before interest and principal payments on the loan being assessed.

The debt service coverage ratio (DSCR) measures CFADS relative to the sum of principal and interest payments for the same period. Under Loan A, debt service in year two is approximately €1.192 million. With CFADS of €1.60 million, DSCR is 1.342x. A 20% decline in CFADS to €1.28 million reduces the ratio to 1.074x.

The company still has approximately €88,000 left after servicing its debt. If the loan agreement requires a minimum DSCR of 1.20x, however, the company is already in breach. If the interest rate simultaneously rises by two percentage points, DSCR falls to 1.006x, leaving approximately €7,000 after debt service. The 1.20x threshold is a model assumption, not a statutory requirement or a standard applied by all banks.

Under Loan B, the same decline in CFADS produces a DSCR of 1.068x. Fixing the interest rate therefore does not ensure compliance with the assumed threshold in this scenario. An annual DSCR may also fail to capture seasonal liquidity shortfalls, so the repayment schedule needs to be assessed against cash flow forecasts throughout the year.

Financial covenants and refinancing terms

A financial covenant breach is distinct from a payment default. Its consequences depend on the loan agreement, including any cure period or provision for a lender-approved waiver. The outcome of a covenant test depends on the contractual definition of the metric and whether it is assessed for a standalone company or a group. For metrics based on debt and EBITDA, the scope of included liabilities and permitted EBITDA adjustments also require scrutiny.

Refinancing costs are also affected by early repayment terms. Section 503(3) of the Slovak Commercial Code allows a borrower to repay funds before the agreed date and pay interest only for the period during which the funds were used. This provision is not among the exceptions to freedom of contract listed in Section 263(1). For a business loan governed by Slovak law, early repayment without additional costs therefore cannot be assumed without reviewing the agreement. Both the wording and legal validity of the relevant terms need to be assessed. ^[5]

Interest rate risk should be distinguished from refinancing risk. A five-year loan with quarterly interest rate resets exposes the company to changes in interest expense. For a loan maturing in one year, the company must also secure funds to repay the outstanding principal. Liquidity planning must therefore distinguish between committed financing for which drawdown conditions have been met and an expected loan renewal.

In the model’s base case, the fixed-rate loan costs approximately €17,000 more. A 20% decline in CFADS causes the company to breach the assumed DSCR threshold under either loan. This result should inform negotiations on the repayment schedule and financial covenants before the loan agreement is signed.

Data and legal position as of October 20, 2026.

^[1] NBS. Interest rates on new euro-denominated loans; non-financial corporations, August 2026.

Source document

^[2] ECB. Distinction between interest payments and other charges in the calculation of the interest rate, question 2022/0005, November 22, 2022.

Source document

^[3] ECB. Survey on the Access to Finance of Enterprises, second quarter of 2026, Table 1.

Source document

^[4] EBA. Guidelines on loan origination and monitoring, EBA/GL/2020/06, paragraphs 142–143; official version published by Banco de España.

Source document

^[5] Slov-Lex. Commercial Code, Act No. 513/1991 Coll., Sections 263 and 503; legally binding version effective from August 17, 2026.

Source document

Net proceeds under each loan are €5,000,000. Gross principal is calculated by dividing net proceeds by one minus the upfront fee rate. The loan is drawn in full at inception, and principal is repaid in five equal annual installments. Interest is calculated on the principal balance at the beginning of each year. In the rate scenarios, Loan A’s interest rate changes at the start of year two and remains at that level until maturity. The margin is unchanged. Years are treated as equal-length periods, without applying a contract-specific day-count convention.

IRR is the rate at which the present value of the five principal and interest payments equals the net proceeds. It is not the annual percentage rate of charge (APRC) used for consumer credit. Total interest and fees are stated in nominal terms, without discounting. Financial ratios relate only to the loan being assessed; the company has no other debt service obligations in the model. CFADS and the 1.20x DSCR threshold are model assumptions. Calculations use unrounded inputs; figures presented in the article are rounded.

David Horváth, PhD, Compliance Officer, CAPITAL MARKETS, o.c.p., a.s.