We draft, review and negotiate covenants in loan agreements, corporate financing and debt issues: positive, negative and financial covenants, waivers and breach management. Clauses that protect both lender and borrower.
Free consultation on covenants
We reply within 24 h
From drafting the clauses to negotiating with the lender and managing breaches and waivers.
We design the covenants in your financing agreement: positive, negative and financial. We define ratios, thresholds, information undertakings, restrictions and the consequences of a breach, tailored to the transaction.
We analyze the covenants in your term sheet or loan agreement from the borrower’s or the lender’s perspective: risk identification, excessive clauses, room for negotiation and alternative protections.
When your company cannot comply with a covenant, we negotiate the waiver with the lender: rationale, conditions, timing and restructuring of the clause to avoid early termination.
We define the right financial ratios: debt/EBITDA, interest coverage, working capital, leverage and repayment capacity. Realistic calibration, aligned with the business plan.
An internal monitoring system to ensure ongoing compliance with covenants: alerts, periodic reporting to the lender, early detection of breaches and an action plan.
Drafting and review of covenants in issues of bonds, debentures and commercial paper: terms of the issue, bondholders’ rights, events of default and cross-default.
Bilateral loan, syndicated loan, project finance, bond issue or acquisition finance: covenants are tailored to the risk, the structure and the interests of the parties.
"In syndicated loans, covenants are the core mechanism protecting the lender pool. They are negotiated in the term sheet, documented in the facility agreement and monitored through quarterly reporting."
"In project finance, covenants protect the project’s cash flow: minimum DSCR, cash sweep, debt service reserve and restrictions on dividend distributions until operational milestones are reached."
"Covenants in bond issues are set out in the issue deed and the final terms. They include cross-default, negative pledge, change of control and restrictions on additional debt."
"In LBOs and acquisition finance, covenants are particularly restrictive: leverage ratio, capex limits, management changes and conditions precedent to closing. The room for negotiation depends on each party’s bargaining power."
Poorly calibrated covenants can stifle the borrower or leave the lender unprotected. Balance is key.
Overly restrictive covenants: if the thresholds are too tight, the company may breach them because of normal swings in the business, triggering unnecessary early termination clauses.
Insufficient or generic covenants: if the clauses are not tailored to the specific transaction, the lender has no effective protection if the borrower’s financial position deteriorates.
Poorly calibrated financial ratios: a debt/EBITDA ratio set without analyzing the business plan can lead to technical breaches that do not reflect any real deterioration in repayment capacity.
Breach of a covenant may entitle the lender to accelerate the loan and demand immediate repayment of the entire debt.
A cross-default clause can mean that a covenant breach under one agreement triggers a default under all of the company’s other financing agreements.
Repeated covenant breaches damage the company’s credibility with lenders, investors and rating agencies, making future financing more expensive.
We draft, review or negotiate your covenants: financial ratios, operational restrictions, information undertakings, waivers and breach management. From the term sheet to restructuring.
A covenant is a contractual clause in a loan or financing agreement that sets obligations, restrictions or undertakings the borrower must comply with for the life of the debt. Its purpose is to protect the lender by reducing the risk of non-payment and ensuring that the borrower keeps a prudent financial position.
Covenants are set out in the loan agreement itself, in the term sheet or in the issue deed for debt securities.
A waiver is a formal authorization granted by the lender allowing the borrower to temporarily breach one or more covenants without triggering the consequences of the breach (acceleration, enforcement of security, etc.).
A waiver does not permanently amend or remove the covenant: it suspends it, subject to conditions and for a specific period, after which the original obligation is fully in force again. It is essential to request it early and with a proper justification.
Breach of a covenant may trigger the following consequences, depending on what the agreement provides:
Yes. Covenants are negotiable contractual clauses agreed between the parties. The room for negotiation depends on each party’s relative bargaining power, the risk of the transaction, the borrower’s credit history and market conditions.
It is essential that the borrower understands each covenant before signing and negotiates realistic thresholds aligned with its business plan. Specialist legal advice at the negotiation stage can prevent serious problems over the life of the loan.
The security package is the set of security, guarantees and undertakings that accompany the financing agreement. It includes the covenants, security over assets (mortgages, pledges), personal guarantees (suretyships, guarantees) and information and reporting obligations.
The security package is defined in the term sheet and documented in the finance documents. Covenants are an essential part of the security package, together with the security and guarantees.
Yes. In bond and debenture issues, covenants are set out in the issue deed and the final terms. They protect bondholders against a deterioration in the issuer’s credit quality. Typical bond covenants include negative pledge, limitation on indebtedness, restricted payments, change of control put and events of default (including cross-default).
In high yield issues, covenants tend to be more restrictive than in investment grade issues, where the issuer’s credit quality provides additional protection.
A well-negotiated covenant protects the lender without stifling the borrower. These are the three pillars we assess in every transaction.
Financial covenant thresholds should be set with enough margin (headroom) over the business plan projections. A covenant without headroom is a breach waiting to happen.
Negative covenants should protect the lender without blocking the borrower’s day-to-day business. Restrictions on dividends, new debt and asset sales should have reasonable exceptions (permitted baskets).
The agreement should provide for graduated mechanisms: prior notice, a cure period, waiver and restructuring before early termination. Sudden death benefits neither party.
If you need help with your covenants, see our securities market services or request a free consultation.
An effective covenant package balances protection for the lender with operational flexibility for the borrower. These are the building blocks we review and optimize in every transaction.
PositiveThe borrower’s active obligations over the life of the loan to maintain transparency and asset quality.
NegativeRestrictions that limit the borrower’s ability to take actions that could impair its capacity to pay.
FinancialQuantitative metrics the borrower must maintain over the life of the financing: leverage, coverage, liquidity and repayment capacity.
WaiversWhen a covenant is about to be breached, acting early is key. Requesting a waiver before the breach shows good faith and makes negotiating with the lender easier.
By transactionStandard LMA covenants. Quarterly reporting. Agent bank as point of contact. Majority lenders for waivers.
Minimum DSCR. Cash sweep. Debt service reserve. Distribution restrictions until COD.
Incurrence covenants (no maintenance covenants). Restricted payments. Limitation on indebtedness. Change of control put.
If you are negotiating or reviewing covenants, these are the terms you need to master.
An obligation, restriction or undertaking that the borrower assumes in a financing agreement to protect the lender and reduce the risk of non-payment.
Formal permission from the lender for the borrower to temporarily breach a covenant without triggering the consequences of default. It does not remove the covenant: it suspends it, subject to conditions.
A leverage ratio that measures how many times the company’s gross operating profit covers its net debt. It is the most common financial covenant in corporate finance.
A clause that triggers a default under one financing agreement if the borrower breaches its obligations under a different financing agreement. It creates a domino effect across all of the debt.
The borrower’s undertaking not to grant security (mortgages, pledges) over its assets in favor of other creditors without the prior consent of the existing lender.
A ratio that measures the ability of the project or company to cover total debt service (principal + interest) with its operating cash flow. Standard in project finance.
A preliminary document setting out the main terms of the financing: amount, term, interest rate, security and covenants. It is not usually binding, but it sets the basis for the negotiation.
The time the borrower is given to remedy a covenant breach before the lender can declare a formal default and trigger the contractual consequences.
A clause guaranteeing that the existing lender will have the same ranking and the same security as any future creditor of the borrower. It prevents subordination without consent.
COVENANT MONITORING CONSOLE
The intensity and type of covenants vary with the structure of the transaction. This dashboard summarizes the usual level of restriction by type of financing.
More restriction means more protection for the lender but less flexibility for the borrower.
Tell us about your transaction and we will explain how we can help you draft, review or negotiate covenants.
Covenants are contractual clauses included in loan, credit facility and debt issue agreements. They set obligations and restrictions for the borrower in order to protect the lender. Although Spanish law has no specific rules on covenants, they fall under the principle of freedom of contract (Article 1255 of the Civil Code) and are subject to the general limits that apply to commercial contracts.
Financial practice distinguishes three main categories: positive covenants (obligations to do: financial reporting, maintaining insurance, keeping licenses), negative covenants (prohibitions: new debt, dividend distributions, asset sales, change of control) and financial covenants (an undertaking to keep financial ratios within defined thresholds: debt/EBITDA, interest coverage, DSCR, working capital).
Breach of a covenant may entitle the lender to terminate the agreement early, enforce security or impose penalties such as an increase in the interest rate. In practice, before termination, the parties usually enter a negotiation phase to restructure the terms or request a waiver (a temporary dispensation for the breach). Acting early and transparently is key to managing a breach without damaging the relationship with the lender.
In syndicated financing, covenants usually follow the standards of the Loan Market Association (LMA), with standardized but negotiable clauses. In bond issues, covenants are set out in the issue deed and may include clauses such as negative pledge, cross-default, change of control and limitation on indebtedness. High yield issues use incurrence covenants (an obligation that applies only when new debt is incurred) instead of maintenance covenants (ongoing compliance).