Debt covenant

A debt covenant may require the borrower to maintain a financial ratio, provide information, limit further borrowing or obtain consent before specified actions. A breach can trigger contractual consequences such as renegotiation or, where the agreement permits, accelerated repayment. Definitions and measurement dates are determined by the loan contract; accounting labels alone may not be sufficient. Covenants can reduce lender risk but restrict management flexibility, so assess both their terms and the borrower's forecast headroom.