Jurisdiction(s):
United Kingdom

Key definition

Covenant definition

What does Covenant mean? A covenant is a binding promise in a contract or deed that imposes an obligation or restriction. In UK and Irish practice the term is used across contexts rather than being defined by statute; its content and enforceability derive from the instrument and case law. Debt capital markets: bond covenants are undertakings in the terms and trust deed that protect bondholders, typically including negative pledge, restrictions on disposals, distributions or incurring debt, information undertakings and financial covenants (maintenance or incurrence). Breach usually constitutes an event of default, with enforcement by the trustee on behalf of holders. Pensions: the employer covenant means...

Covenant-lite and covenant-loose leveraged finance: structures, springing covenants, bond-style terms, documentation trends, and investor risk considerations in Europe

Published by a LexisNexis Banking & Finance expert

Practice notes

Overview

This Practice Note outlines key characteristics of Covenant loose and covenant lite financings and considers certain risks that investors in these facilities may encounter. It assumes a degree of familiarity with leveraged finance terminology and documentation. For introductory material on leveraged finance financial covenants, see Practice Note: Leveraged finance—financial covenants. For an introductory guide to acquisition finance, see Practice Note: Introductory guide to acquisition finance. The Glossary of acquisition finance terms and jargon may also be helpful...

Terminology

Traditional ‘covenanted’ facility

European leveraged facility agreements have traditionally included a package of financial covenants designed to monitor the borrower‑group’s financial performance against a base case financial model. The full suite typically comprises the following covenants:

Leverage — this is the ratio of the group’s total [net] indebtedness to its earnings before interest, tax, depreciation and amortisation ( EBITDA ). The leverage ratio gauges the group’s indebtedness against its ordinary operating profit; the higher the ratio, the more indebted the group and the greater the perceived risk to lenders. The covenanted leverage ratio ratchets downward over time, reflecting the expectation that borrowings will reduce...

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Web page updated on 21/05/2026

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