Debt covenants restrict borrowers from taking actions that can result in a significant adverse impact or increased risk for the lender. (I'm posting info for shareholders who are not accountants AJ)
Violation of Debt Covenants When a debt covenant is violated, depending on the severity, the lender can do several things:
Demand penalty payment Increase the predetermined interest rate Increase the amount of collateral Demand full immediate repayment of the loan Terminate the debt agreement
Debt covenants are restrictions that lenders (creditors, debt holders, investors) put on lending agreements to limit the actions of the borrower (debtor). In other words, debt covenants are agreements between a company and its lenders that the company will operate within certain rules set by the lenders.
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