Jurisdiction(s):
United Kingdom

Key definition

Leverage definition

What does Leverage mean? Leverage describes using borrowing or economically similar techniques to increase exposure to an asset, business or market beyond the investor’s own capital. Exposure may exceed 100% through debt, margin lending, repos or derivatives (for example, futures, options and swaps). It is a descriptive finance term rather than a single statutory concept, although defined meanings exist in regulated areas: the AIFMD regime (UK onshored and in Ireland/EU) defines leverage for alternative investment funds, and prudential rules for banks and investment firms impose a leverage ratio. In UK corporate finance, ‘gearing’ is the near-equivalent; ‘leverage’ is the common US term. Usage is broadly...

Leveraged finance covenants: leverage, interest and cashflow cover ratios, maintenance versus incurrence, TLB springing tests, LMA drafting guidance, headroom and EBITDA adjustments, testing, equity cures, and IFRS/market guidance

Published by a LexisNexis Banking & Finance expert

Practice notes

Financial covenants feature across many types of banking deal to monitor and assess the financial performance of the borrower company or group. This Practice Note outlines the role of financial covenants within leveraged finance.

It covers:

the meaning of financial covenants
how financial covenants operate in leveraged finance transactions
the covenant package typically used on a classic leveraged finance transaction
the methods for testing financial covenants
other applications of financial ratios, and
equity cure, mulligan and deemed cure provisions

See the Glossary of acquisition finance terms and jargon for definitions of certain expressions used in this Practice Note.

What are financial covenants?

Undertakings (also called ‘covenants’) are promises from the borrower (and sometimes other members of the borrower’s group) to the lender about carrying out, or refraining from, particular actions. Financial covenants are a distinct category of covenant or undertaking. They are commitments to achieve or maintain specified financial thresholds. Financial covenants allow the lender to track the financial performance of the borrower and/or its group...

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Web page updated on 21/05/2026

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