Covenant

A contractual restriction in a debt agreement. Maintenance covenants require ongoing compliance (e.g., leverage below 5x). Incurrence covenants only trigger on new actions.

Why it matters

Covenants are the creditor's main protection against a borrower destroying value. Tight covenants give lenders an early seat at the table if the business deteriorates. Loose covenants (common in "covenant-lite" deals) mean creditors have fewer tools and may not get early warning of trouble.

How to read it

Check the cushion: if the leverage covenant is 6x and the company is at 4.5x, there's 1.5x of headroom. Shrinking cushion is a red flag. For bonds (which are typically incurrence-only), focus on restricted payments covenants (limits on dividends and buybacks) and debt incurrence baskets. The weakening of covenant protections in recent vintage deals is a major risk factor for the next credit cycle.

Related terms

10Y Treasury · Altman Z-Score · Asset Sensitivity · Basel III · Bond ETF · Bretton Woods

Open this term in the app → — no account needed; browse the full glossary while you research.