Covenant

1. Law.

A formal legal agreement to take, or not to take, certain actions.

2. Debt documentation - loan documentation - bond documentation.

In debt documentation, covenants are generally about protecting the lender-investor against an increase in their credit risk relating to the borrower.

In this context, covenants are generally promises given by the borrower to take - or not to take - specified actions relevant to the borrower's creditworthiness.

For example, a borrower's financial covenant to maintain a minimum ratio of net worth to debt.

Breach - or potential breach - of such a covenant is designed to act as an early warning indicator of potential problems.

3. Pensions.

In relation to pension funds, the credit strength of the sponsoring employer and its commitment to the pension fund.

See also

• Acceleration
• Accounting exposure
• Asset cover
• Breach of covenant
• Clause
• Compliance
• Condition
• Contingent covenant
• Covenant trigger
• Covenant-lite
• Credit risk
• Event of default
• Financial covenant
• Generally accepted accounting principles
• Grace period
• Headroom
• Incurrence covenant
• Interest cover
• Loan agreement
• Maintenance covenant
• Net worth
• Non-financial covenant
• Representations
• Restrictive covenant
• Sponsor
• Term
• Trigger event
• Waiver
• Warranty

Other links

Treasury Essentials: Covenants, The Treasurer, March 2013