We normally see Covenants in agreement between the lender and the borrower.

In this article on Glossary of Debt, we look at some of the salient points of Covenants.

Covenants are conditions imposed on loans and bonds to protect lenders against defaults.

They normally stipulate things like:

• Minimum level of asset cover;
• A maximum level of gearing;
• A minimum level of interest cover;
• That no prior ranking debt is subsequently arranged;
• That specified assets cannot be sold without the consent of the lender;
• That the lender has the right to review the loan in the event of the business being taken over or control otherwise changing hands;
• That the lender has the right to call in the loan in the event of the borrower defaulting on other loans.

Of course, whether the borrower re company accepts the restrictive covenants proposed by the lender will obviously depend on the strength of its negotiating position. Large giants or big publicly quoted companies can normally avoid most of the covenants but unfortunately those smaller unquoted companies might not be so lucky.

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