Bonds & rates
Covenant
A condition in a loan agreement that the borrower must keep to.
How it works
Maintenance covenants require ratios such as net debt to EBITDA to stay within limits, tested regularly. Incurrence covenants only bite when the company takes a specific action.
Breaching one gives lenders rights — to renegotiate, demand repayment, or take control — well before any payment is missed.
Where it misleads people
Covenant-lite lending, common in easy credit conditions, removes the early warning system. Problems surface later and are further advanced when they do.
Related terms
- DefaultA borrower failing to make a payment, or breaching a term of the debt agreement.
- Net debt / EBITDAHow many years of operating earnings it would take to repay net borrowings.
- Credit riskThe risk that a borrower fails to make the payments it promised.
- Interest coverageHow many times over a company’s operating profit covers its interest bill.
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