Contractual provision in a Credit Agreement or a Bond Indenture requiring the borrower to comply with a certain pre-agreed threshold only in case of certain events. The ultimate purpose is protecting the lenders or bondholders against certain actions that the borrowers or issuers may perform which could result in a deterioration of the credit-worthiness of a company.
Unlike Financial (or Maintenance) Covenants, Incurrence Covenants are not tested on a periodic basis. However, if the borrower or issuer does not comply with the incurrence covenant thresholds, they will not be permitted to perform the relevant events under the terms of the debt documentation.
Examples of incurrence covenants: debt incurrence up to a certain monetary amount or up to a certain leverage ratio, payment of dividends, sale of assets.
See also: Financial Covenant