What are Debt Covenants?

Debt covenants are conditions a borrower agrees to in a loan contract, on top of paying the money back. One type gets tested on a schedule, usually every quarter, whether the borrower does anything or not. Another type applies to significant events the contract names: borrowing again, paying money out to its owners, or buying or selling a business. Break either and the contract sets what follows: a set time to fix it, tighter terms, or the loan called in.

Debt covenants are the conditions attached to borrowed money. A lender hands over cash and cannot watch the business day to day. So the contract sets out what the borrower must keep doing, what it must report, and what it must ask permission for. Those conditions fall into two types, and the difference decides how tight the loan is. Maintenance covenants get tested on a schedule, usually each quarter, and the borrower has to satisfy every one at each test. Common examples cap debt at an agreed multiple of earnings or require interest coverage above an agreed level, so a weak quarter on its own can break either. The reporting sits alongside those tests: monthly or quarterly accounts, with a signed statement showing each test passes. Incurrence covenants apply to significant events the contract names, such as borrowing again, paying the owners, or buying or selling a business. Until one of those events happens, there is nothing to test. A loan that keeps the second type and drops the scheduled tests is called covenant-lite. What a breach costs depends on the condition and the contract. Many agreements allow a period to put it right, and some conditions simply tighten the terms instead: reporting more often, a higher rate, or a block on paying the owners. Default sits at the sharp end, and it lets the lender demand everything back at once.

A lawyer holds a licence to practise, and keeping it takes more than avoiding trouble. Some requirements arrive on a cycle: training hours by a set date, dues, and client money held in a separate account that somebody checks. A lawyer who does nothing at all still falls short of the training requirement, because the deadline arrives regardless. Other requirements attach to decisions, so practising in another state or taking on work that clashes with an existing client needs clearance first. Fall short on either kind and the licence can go, though a reminder and a late fee settle most of it.