Financial Covenants
What are Financial Covenants?
Financial covenants are conditions or restrictions that are included in financial agreements, such as loan agreements or credit agreements, that require the borrower to meet certain financial performance targets or ratios. Financial covenants are designed to protect the lender's interests by ensuring that the borrower is able to meet its financial obligations and maintain a certain level of financial performance.
Financial covenants typically involve the establishment of specific financial ratios or targets that the borrower must meet on a regular basis, such as debt-to-equity ratio, interest coverage ratio, or return on investment. If the borrower fails to meet these financial covenants, it may be in default of the financial agreement and may be subject to penalties or other consequences, such as the acceleration of debt repayment or the loss of access to credit.
Financial covenants can be either positive or negative. Positive financial covenants require the borrower to maintain a certain level of financial performance, while negative financial covenants prohibit the borrower from taking certain actions, such as incurring additional debt or paying dividends to shareholders.
Overall, financial covenants are conditions or restrictions that are included in financial agreements and require the borrower to meet certain financial performance targets or ratios. They are designed to protect the lender's interests by ensuring that the borrower is able to meet its financial obligations and maintain a certain level of financial performance.
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