Incurrence Covenant
Short definition
An incurrence covenant is tested only at a deal moment (new debt, dividend, acquisition). The ratio can deteriorate between tests without a breach; the deal gate shuts.
Detailed explanation
Common in high-yield bonds. “More debt only if leverage ≤ cap” is not a maintenance test. Existing debt may sit above the cap between tests; new deals stop.
Bank packs usually want maintenance. Hybrid packs carry both.
Why it matters for the CFO
The M&A and dividend calendar hangs on this gate. A CFO used to maintenance must not read inter-period “freedom” as cash freedom.
How to read it
When the gate is shut the ratio is above the cap; existing creditors collect, new creditors cannot enter.
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Definitions are educational. They are not investment, credit or tax advice.