Covenant definition
/What is a Covenant?
A covenant is a contractual requirement that one party to a contract either specifically complete a task or to refrain from doing something. The term is frequently used in lending agreements, where a borrower is not allowed to do certain things, such as pay dividends, while the loan is still unpaid. If a covenant is breached, the lender has the right to call the associated loan. Covenants are designed to protect the interests of the lender.
Bond Covenants
Covenants are commonly included in bond agreements. When the issuer of a bond violates one of these covenants, the issuer is in technical default. When this happens, a credit rating agency may downgrade the rating of the bond, thereby making it less attractive to investors on the secondary market.
Positive Covenants vs. Negative Covenants
A covenant is positive when it requires a party to take action, and is negative when it restricts a party from taking action.