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Covenants are undertakings given by a borrower as part of a term loan agreement. Their purpose is to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. From the borrower's point of view covenants often appear to be an obstacle at the time of
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Covenants can potentially have negative consequences as well. As the creditor is imposing restrictions on how the debtor should conduct business, the debtor's economic freedom is restricted. This may lead to decreased efficiency. When a covenant is broken and additional equity should be contributed,
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Proponents of the use of covenants, emphasizing the early warning function of covenants, take the case further by arguing that well-designed covenants provide not only timely performance indicators but also open up lines of communication between borrower and lender.
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issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.
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Covenants can be financial, information, ownership, affirmative, negative or positive covenants. Often, the breach of any covenant gives the lender the right to call the loan or collect interest at a higher rate.
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the debtor might not be able to provide it or at least not adequately. This results in making the whole loan due; a resulting fire sale may lead to high write-offs on the debtor's books.
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Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender.
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on the loan being declared, penalties being applied, or the loan being
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negotiating a loan and burdensome restriction during its term.
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Cornell Law School Legal
Definition: Acceleration Clause
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Typical covenants for real estate related loans are the
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