Debt Covenant
A debt covenant is a contractual limit on the borrower — maintain a ratio, not do a thing, or report a thing — that turns a miss into a default or a fee.
Definition
Maintenance covenants are tested on a schedule (leverage, coverage, liquidity). Incurrence covenants trigger only if you take an action (more debt, a dividend). Covenant-lite is the latter. A breach is a negotiation or an event of default.
Why it matters
Covenants are the credit’s early-warning and control rights. Lite documents move the warning from the contract to the price.
Case
A 2019 loan with a 6× maintenance leverage covenant vs a 2021 cov-lite clone. The first became a waive-and-amend in 2020; the second became an amend-and-extend in 2024 with no tripwire.
How to read it
Maintenance vs incurrence, EBITDA add-backs, and builder baskets. The ratio definition is the covenant.