Covenant

A condition written into a loan or bond agreement that restricts the borrower’s actions (e.g. maximum leverage, minimum interest coverage) to protect the lender. Breaching a covenant can trigger default even if payments are current.

Practise it

Why not just borrow more? Step leverage up and watch coverage fall, the rating decay and the spread widen until WACC bottoms out.

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Where Covenant comes up

Credit and Covenant Modelling: What a Lender Actually TestsA sponsor models the upside. A lender models the case where it goes wrong. Both live in the same file.Read the guide — 11 min How to Build a Three-Statement Model That Actually BalancesThe build order matters more than the formulas. Get the sequence right and it balances on the first try.Read the guide — 13 min How to Build an LBO Model: The Build Order That Survives a Modelling TestUnder a 90-minute clock, the build order is the difference between a returns number and a half-finished model.Read the guide — 13 min

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Related Corporate Finance terms

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