Covenant

Nick Name
Loan Covenant
Parent term

Covenants are contractual agreements that protect creditors from actions debtors may take that could decrease the credit quality of the loan

Loan covenants help ensure that borrowers don't do anything that can impact the credit quality of the Loan

Typical covenants include:
  • Prohibition on the creditor taking out additional debt
  • Prohibitions on the creditor selling or otherwise encumbering colalteral
  • Prepaying other forms of debt first
  • Issuing additional debt in a senior or similar position
  • Paying large dividends to equity holders
  • Covenants can also help generate additional income for lenders
  • When a borrower breaks a covenant, the lender may negotiate a amendment fee or set the loan at a higher rate

Other Covenant Info
  • Coventants can be referred to as " the fine print"