covenant (redirected from covenantors)

Covenant

A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out.

Notes:

The purpose of a covenant is to give the lender more security. Covenants can cover everything from minimum dividend payments to levels that must be maintained in working capital.

See also: Indenture, Negative Covenant

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Covenant

An agreed action to be undertaken (Positive) or not done (Negative). A breach of a covenant is a default.

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covenant

A clause in a loan agreement written to protect the lender's claim by keeping the borrower's financial position approximately the same as it was at the time the loan agreement was made. Essentially, covenants spell out what the borrower may do and must do in order to satisfy the terms of the loan. For example, the borrower may be prohibited from issuing more debt by using certain assets as collateral. Likewise, the borrower may be required to issue reports to bondholders on certain dates. Also called protective covenant, restrictive covenant. See also negative covenant, positive covenant.

Case Study In February 2002 Qwest Communications issued a warning that the company was in danger of violating a bank loan covenant by the end of June. A major slump in the telecom business combined with heavy indebtedness caused concern that the firm's debt would exceed the specified maximum of 3.75 earnings before interest, taxes, depreciation, and amortization. A month later the company announced that in return for agreeing to use $608 million from a $1.5 billion bond issue to reduce bank debt, the bankers agreed to a concession that raised the covenant maximum to 4.25 until the end of September, and 4.00 during the following six months. The covenant had been included as part of the original bank loan agreement in order to help insure that Qwest could continue to meet its existing obligations before taking on additional debt.