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Covenant (Banking & Finance) meaning
Published by a LexisNexis Banking & Finance expert
What does Covenant (Banking & Finance) mean?
In banking and finance, a covenant is a contractual undertaking by a borrower or issuer to do, or refrain from doing, specified actions for the benefit of lenders or bondholders. It is not defined by statute; rather, it is a descriptive term used across loan agreements and bond trust deeds/indentures in the UK and Ireland.
Covenants typically include affirmative (or positive) undertakings (for example, information and reporting obligations), negative (or restrictive) undertakings (such as limitations on additional debt, disposals, liens or distributions), and financial covenants (for example, leverage and interest cover ratios). In loans, financial covenants are commonly “maintenance” tests, often tested quarterly; in high-yield bonds they are generally “incurrence” covenants triggered by specified actions. Documentation may include cure rights, equity cures, holidays and thresholds.
The practical purpose is credit protection: monitoring performance, preserving asset value and controlling risk-taking. Breach of a covenant is usually an event of default, permitting acceleration and enforcement (in bonds, typically via the trustee subject to bondholder directions and thresholds).
Usage and legal effect are broadly consistent across England & Wales, Scotland, Northern Ireland and Ireland, although terminology may sit within different deed/formalities rules; remedies follow the governing law of the finance documents.
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View the related Precedents about Covenant (Banking & Finance)
PRECEDENTS
Precedent: bank account charge over blocked accounts (chargor-specific monies) for syndicated facilities (England and Wales)
This Deed is made on [ insert day and month ] 20[ insert year ] Parties [ Insert name of Chargor ], being a company incorporated in England and Wales, with registered number [ insert company number ], and whose registered office is at [ insert address ] (the “ Chargor ”); and 1 [ Insert name of Security Agent ], acting as security agent and trustee for the Finance Parties pursuant to the terms and conditions set out in the [ Facilities Agreement OR Intercreditor Agreement OR Security Trust Deed ] (the “ Security Agent ”). Recitals: (A) The Finance Parties have consented to provide loan facilities subject to the terms and conditions set out in the Facilities Agreement (as defined below). (B) As a condition precedent to the loan facilities becoming available, the Chargor must execute this Deed for the purpose of granting security in favour of the Security Agent in relation to the Secured Obligations (as defined below)...
22 May
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PRECEDENTS
Precedent deed: security assignment of insurance policies and proceeds to a security agent under a syndicated facilities agreement, with notice/acknowledgement and deed of accession (England and Wales)
This Deed is entered into on [ insert day and month ] 20[ insert year ], as of that date Parties [ insert name of Assignor ], a company incorporated in England and Wales with company number [ insert company number ], whose registered office is at [ insert address ] (the Assignor); and [ insert name of Security Agent ], acting as security agent and trustee for the Finance Parties pursuant to the terms and conditions contained in the [ [ Facilities Agreement ] OR [ Intercreditor Agreement ] OR [ Security Trust Deed ] ] (the Security Agent). Recitals: (A) The Finance Parties have consented to provide the loan facilities, subject to the terms and conditions set out in the Facilities Agreement (as defined below). (B) A condition precedent to the availability of the loan facilities is that the Assignor enters into this Deed to provide security in favour of the Security Agent in respect of...
22 May
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PRECEDENTS
Deed of Assignment of Receivables (Book Debts) by Way of Security, with Enforcement, Receiver and Notice/Acknowledgement Provisions (England and Wales)
This Assignment is dated [ insert day and month ] 20[ insert year ]. Parties 1 [ insert name of Assignor ], a company incorporated in England and Wales with registered number [ insert company number ], having its registered office at [ insert address ] (the Assignor); and 2 [ insert name of Lender ] of [ insert address ] (the Lender). Background The Lender has agreed to provide a loan facility to the Assignor on the terms and conditions contained in the Facility Agreement (as defined below). As a condition precedent to the loan facility being available, the Assignor must enter into this Assignment to create security in favour of the Lender for the Secured Obligations (as defined below)...
22 May
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