Covenant

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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


Other links

Treasury Essentials: Covenants, The Treasurer, March 2013