Covenants in Debt Instruments

Covenants in debt instruments are legally binding agreements that set specific rules or restrictions for the borrower, aimed at protecting the lender’s interests. They can require the borrower to maintain certain financial ratios, limit additional borrowing, or prohibit asset sales without approval. These covenants help ensure the borrower stays financially healthy and able to repay the debt, reducing risk for the lender. If covenants are violated, the lender may have the right to demand immediate repayment or enforce penalties, thereby providing a safeguard against financial instability.