Loan covenant
condition in a commercial loan or bond agreement
A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.
Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. The legal provision in the loan agreement providing for the loan to be "called" is the "acceleration clause": once the buyer defaults, all future payments due under the loan are "accelerated" and deemed to be due and payable immediately.
Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender.
Function
Covenants are undertakings given by a borrower as part of a term loan agreement. Their purpose is to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. From the borrower's point of view covenants often appear to be an obstacle at the time of negotiating a loan and burdensome restriction during its term.
Proponents of the use of covenants, emphasizing the early warning function of covenants, take the case further by arguing that well-designed covenants provide not only timely performance indicators but also open up lines of communication between borrower and lender.
Typical covenants for real estate related loans are the Loan to Value Ratio (LTV), the debt service coverage ratio (DSCR) and Interest Service Coverage Ratio (ISCR).
Covenants can potentially have negative consequences as well.
Begin with the source’s own compact description: “Loan covenant” is condition in a commercial loan or bond agreement. The dossier treats that line as a proposition to test through Loan, covenant and condition, not as a finished interpretation.
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The citation trail is more important than the brevity of the summary: it shows where individual claims can be examined in context. The source revision retrieved here is dated Jul 7, 2026. The linked authority identifier is Q1138039. None of the 0 selected statements returned an explicit reference.
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This entry incorporates text from “Loan covenant” on English Wikipedia. Contributors are listed in the page history. Text is available under the Creative Commons Attribution-ShareAlike 4.0 License. Selected authority identifiers and statements are retrieved from Wikidata under CC0; their references and qualifiers remain part of the verification path.