Loan covenants are the lender’s early warning system and the borrower’s most frequent source of unexpected constraint.
Financial covenants. Leverage, fixed charge coverage, minimum liquidity, and in asset-based facilities a borrowing base. Definitions matter more than levels: what is included in EBITDA, which add-backs are permitted, whether they are capped, and how acquisitions are treated on a pro forma basis.
Negative covenants restrict indebtedness, liens, investments, asset sales, restricted payments including distributions to owners, affiliate transactions, mergers, and changes of business. Each has negotiated baskets and exceptions, and the interaction of baskets — whether unused capacity carries over or reclassifies — determines real flexibility.
Affirmative covenants cover reporting, insurance, compliance, further assurances and inspection rights.
Cure rights. Equity cure provisions permit a sponsor to inject capital to cure a financial covenant breach, subject to limits on frequency and amount.
Cross-default and cross-acceleration link the facility to other obligations, and the difference between them matters considerably in a workout.
Materiality and MAC defaults give lenders discretion that is rarely invoked alone but is significant in combination.
Practical borrower guidance. Model the covenants against the plan and a downside case before signing, and negotiate the definitions rather than the headline ratios.