Glossary
Credit and risk
What is covenant?
A contractual test that hands you rights when the business deteriorates.
Maintenance covenants are tested every period and let you act early. Losing them does not change whether a company fails, only whether you find out in time to do anything.
A worked example
A loan has a 6.0x maximum leverage covenant, tested every quarter. The borrower sits at 5.0x, so EBITDA would have to fall about 17% before the test trips. That gap is the headroom.
Where it catches you in the game
- Strict covenants trigger the workout room early; cov-lite delays it until value is gone.
It comes up most on the private equity desk and the private credit desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what covenant does to your returns.