Debt Covenant
Conditions imposed by a lender in a loan agreement that the borrower must maintain to avoid triggering a default.
Debt covenants come in two types: affirmative covenants (what the borrower must do — maintain insurance, provide financial statements, pay taxes) and negative covenants (what the borrower cannot do — take on additional debt above specified levels, make acquisitions above a threshold, pay dividends). Financial maintenance covenants require the borrower to maintain specific financial ratios such as minimum interest coverage, maximum leverage, or minimum liquidity.
Covenant violations give lenders the right to declare an event of default, accelerate repayment of the loan, and exercise remedies against collateral. Even technical violations — missing a reporting deadline, not obtaining required lender consent for a transaction — can trigger cross-default provisions across other debt instruments. Document intelligence is invaluable for tracking covenant compliance across complex loan agreements, identifying what ratios are measured, when they are tested, and what the cure rights are if a violation occurs.
More financial Terms
10-K Filing
An annual report filed with the SEC that provides a comprehensive overview of a public company's financial performance.
Balance Sheet
A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of a company's operating profitability.
Amortization
The gradual reduction of an intangible asset's value or a loan balance through scheduled periodic payments.
Revenue Recognition
The accounting principle that determines when and how revenue is recorded in financial statements.
Cash Flow Statement
A financial statement that tracks the movement of cash in and out of a business across operating, investing, and financing activities.
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