Covenant

Financial covenants and negative covenants are terms commonly found in bond agreements. Both types of covenants are designed to safeguard the interests of bondholders and ensure the issuer's financial stability.

Financial covenant

A financial covenant is a requirement specified in a bond agreement that relates to the financial performance of the issuer.

Financial covenants typically include metrics such as debt-to-equity ratio, interest coverage ratio, or minimum cash reserves that the issuer must maintain.

The purpose of financial covenants is to ensure that the issuer remains financially healthy and capable of meeting its obligations to bondholders.

Negative covenant

A negative covenant is a restriction imposed on the issuer that prohibits certain actions or activities that could negatively impact the issuer's ability to repay the bond.

Negative covenants may include restrictions on incurring additional debt, paying dividends, or selling off key assets without bondholder approval.

The goal of negative covenants is to protect bondholders by limiting the issuer's ability to take actions that could weaken its financial position and jeopardize bond repayment.