The promise made by the borrower to the lender in a loan agreement. The most important of these are financial covenants, for example, a promise that the ratio of debt to EBITDA will not exceed a certain level. If a covenant is breached, the bank can call in the loan or enforce its security. Banks and bondholders have different kinds of covenants. Banks have “maintenance covenants”. These have teeth: they actively require a company to maintain certain ratio levels. Bondholders generally have “incurrence covenants”. These are relatively toothless, because they kick in only if the borrower wants to make a change (for example, “incur” new debt).
