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.