Debt & Other Covenants

Debt and other financial covenants, are usually parts of an agreement between a borrower and lender outlining specific  requirements that the borrower must meet throughout the term of a loan. This is one way that the lender can manage risk associated with that loan.

Covenants usually require that the borrower provides reports on covenant compliance at agreed intervals. Though each covenant is unique, some common metrics include debt-to-equity ratio, current ratio, or interest coverage ratio; Debt Service Coverage Ratio (DSCR); Capital Expenditure (Capex) Covenants; Liquidity Covenants; and Restrictive covenants that impose limitations on the borrower’s actions, such as buying or selling assets, incurring additional debt, or changing the company’s ownership structure.