Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Financial covenant definition

What does Financial covenant mean? In practice, a financial covenant is a contractual promise by a borrower (and sometimes a guarantor) in a loan or bond document to meet specified financial tests, typically expressed as ratios. It is not defined by statute or case law; the term is a widely used descriptor across banking and finance in the UK and Ireland. Common financial covenants in LMA‑style facilities agreements include leverage (net debt/EBITDA), interest cover, debt service cover, loan‑to‑value (real estate), and minimum liquidity or cashflow. They are measured using bespoke definitions in the agreement and tested either as maintenance covenants (periodically by reference to financial...

Financial covenants in UK loan facilities: purposes, selection, drafting and testing; common ratios; breach consequences; LMA approach; GAAP/IFRS 16/18 impacts; compliance certificates; incurrence features and covenant lite

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Practice notes

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This Practice Note serves as a primer on financial covenants (financial undertakings). It outlines the rationale for using financial covenants, then describes how they are established and measured. It also covers the typical financial covenants seen in commercial finance, such as:

minimum net worth test
gearing ratio
leverage ratio (or debt to equity ratio)
current ratio (or acid test ratio)
cashflow ratio
interest cover ratio
loan to value ratio

Note that this Practice Note does not delve into financial covenants for specialist transactions in detail. The final section, however, signposts additional resources on applying financial covenants across various specialist transactions. Where relevant, it draws attention to provisions in the Loan Market Association (LMA) senior multi-currency compounded rates/term rates term and revolving facilities agreement for leveraged acquisition finance transactions (the LMA leveraged facilities agreement) (available to LMA members on the LMA website). Note also that the LMA investment grade facility documentation omits financial covenants because they are considered too transaction specific on investment grade transactions.

What are financial covenants?...

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Web page updated on 21/05/2026

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