Financial covenants

Coll­ec­tive term for various clau­ses in loan agree­ments that oblige the borro­wing company to comply with certain ratios rela­ting to equity, debt, earnings and/or liqui­dity. Finan­cial covenants are ancil­lary provi­si­ons rela­ting in parti­cu­lar to Credit agree­ments. They regu­late beha­vi­oral obli­ga­ti­ons, i.e. not payment obli­ga­ti­ons, and contain legal conse­quence clau­ses in the form of sanc­tions. They help banks to iden­tify and coun­ter­act impen­ding defaults at an early stage and are tail­o­red to the company in ques­tion. Parti­cu­larly important are clau­ses rela­ting to earnings and cash flow ratios. These are If the covenants are brea­ched, this often leads to higher inte­rest rates on the loan and the invol­vement of exter­nal consul­tants at the company.