Covenants

Last Updated: Jun 6, 2019

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A Covenant is a legal term for a promise to do something (i.e., an affirmative covenant), refrain from doing something (i.e., a negative covenant) or maintain something (i.e., a maintenance covenant). Covenants are included in credit agreements to protect lenders from detrimental actions taken by borrowers. One of the most common and important categories of covenants are financial covenants, which require a borrower to meet certain financial thresholds during the term of a loan. The breach by a borrower of a covenant usually triggers an event of default and affords the lender certain remedies under the credit agreement, including acceleration of the loan.