Debt Covenant

A debt or financial covenant is a contractual agreement between a borrower and a lender that imposes certain restrictions or requirements on the borrower's financial activities and operations. It is typically included in loan agreements or bond indentures to protect the lender's interests and ensure the borrower's ability to repay the debt. Debt covenants outline specific terms and conditions that the borrower must adhere to throughout the loan or bond. These provisions help mitigate the lender's risk by maintaining the borrower's financial health and reducing the likelihood of default. The covenants can cover various aspects of the borrower's financial management, such as financial ratios, capital structure, asset sales, dividend payments, and limitations on additional debt issuance.