Covenants and Lending Standards

Loan covenants translate underwriting assumptions into obligations that continue after closing. Financial Covenants explains maintenance, incurrence, and springing tests, including leverage, coverage, liquidity, and net-worth measures.

The broader Loan Covenant concept also includes affirmative duties, negative restrictions, reporting requirements, collateral protections, and events of default. A non-ratio covenant can be as important as a ratio test; it is simply expressed through conduct or a condition rather than a financial calculation.

Covenant analysis begins with the signed credit agreement and amendments. Verify capitalized definitions, included entities, measurement periods, permitted adjustments, test dates, thresholds, headroom, cure rights, and lender voting requirements. Generic ratio formulas cannot establish compliance when the contract defines EBITDA, debt, cash, or fixed charges differently.

A failed covenant does not always produce immediate acceleration. Notice, grace, waiver, amendment, equity-cure, and enforcement provisions determine the result. These pages provide general financial education rather than legal advice or a conclusion about a specific credit agreement.

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