Debt Covenants

Debt covenants are agreements or conditions set by lenders in loan contracts that borrowers must adhere to. They are designed to protect the lender's investment by ensuring the borrower maintains certain financial health standards. Common covenants may include limits on borrowing more debt, requirements to maintain specific financial ratios (like debt-to-equity ratios), or commitments to provide regular financial statements. If a borrower fails to meet these conditions, it could lead to penalties or even the loan being called due, meaning the lender can demand repayment. Essentially, they are rules to help manage risk in lending.