Covenant
Short definition
A covenant is a financial or non-financial undertaking in the facility. A breach can trigger default, a rate step-up, a draw stop or acceleration; it is not a soft target.
Detailed explanation
Financial covenants test a ratio (DSCR, net debt/EBITDA, ICR, minimum cash) or an amount. Non-financials include negative pledge, dividend lock-up, asset sales, change of control and information. Maintenance tests every period; incurrence only at a deal moment.
Definitions are pack-specific: EBITDA add-backs, net-debt scope, FX. Management EBITDA and covenant EBITDA are different books.
Why it matters for the CFO
Flexibility, dividends and M&A hang on this text. Headroom is the cushion before breach; after breach it is a waiver negotiation.
How to read it
Test frequency (quarterly/annual) and equity cure change the cost of a miss. There is no universal threshold; the pack writes it.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.