What are covenants in a loan agreement?

A loan covenant is simply a clause in the loan agreement that requires the borrower to do or refrain from doing, certain things. Affirmative or positive covenants are things that the borrower must do or agree to during the life of the loan.

What are protective covenants in finance?

Protective covenant. A part of an indenture or loan agreement that limits certain actions a company may take during the term of the loan to protect the lender’s interests.

What are loan covenants examples?

Examples of Positive Debt Covenants

• Present financial statements annually within a specified time frame.
• Maintain life insurance policies on key employees.
• Keep all facilities in good working condition.
• Pay all property and income taxes on time.
• Maintain property insurance and a reasonable amount of liability insurance.

What types of loan covenants would you require?

Bank loan agreements may include three types of loan covenants. These include: Affirmative Loan Covenants, Negative Loan Covenants, and Financial Loan Covenants.

Who do covenants protect?

They are essentially restrictions on the borrower/ issuer imposed by the lender/bondholder that require the company to do or refrain from doing certain activities. Covenants help protect investors when credit quality starts to deteriorate.

What is a protective covenants agreement?

This is why many employment contracts contain restrictive agreements to protect current employers when a worker leaves, from the loss of clients and the introduction of insider knowledge or strategies. These are agreements that prohibit a former employee from “soliciting” clients of a former employer.

What is the difference between positive and negative covenants?

Positive Covenants and Negative (Restrictive) Covenants A covenant can be either positive or negative. A negative obligation is often referred to as a restrictive covenant. Positive covenants are obligations to do something, such as keep contribute to a maintenance fund or maintain a wall.

What happens when debt covenants are violated?

Violation of Debt Covenants Increase the predetermined interest rate. Increase the amount of collateral. Demand full immediate repayment of the loan. Terminate the debt agreement.

What are the different types of loan covenants?

In loan covenants, there are three commonly known types of agreements: affirmative loan covenants, negative loan covenants, and financial loan covenants.

Why are financial covenants important to the lender?

Financial covenants are a means of gaining the trust of the lender. In this way, the lending party is ensured that there is security against the risks associated with a loan agreement. 2. Stability in financial performance

What happens if a borrower does not comply with a covenant?

A condition that the borrower must comply in order to adhere to the terms in the loan agreement. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usually in full).

What are maintenance covenants in a loan agreement?

Maintenance Covenants. Maintenance covenants require borrowers to meet certain financial tests every reporting period, usually quarterly, regardless of any new debt issuance or similar activities. If a borrower’s loan agreement contains a covenant that limits debt to cash flow but with a maintenance test instead of an incurrence test,…