Contractual provision in a Credit Agreement requiring the borrower to maintain a certain financial metric above or below a pre-agreed threshold. Financial covenants are tested periodically (most typically on a quarterly basis), and lack of compliance with the threshold on the test date results in an event of default under the credit agreement.

Examples of financial covenants: Net or Gross Leverage (most frequent), Interest Coverage, Fixed Charge Coverage Ratio, Minimum EBITDA, Maximum Capex, etc.

Also known as Maintenance Covenant.

Learn more about covenants in our Legal Primer: Safeguarding Credit Quality and Asset Value. In this webinar, Apostolos Gkoutzinis, Head of EMEA Capital Markets and Co-Head of European Leveraged Finance, Milbank LLP explains the principal techniques to safeguard the restricted group in leveraged finance and high-yield documentation.