Covenants in debt capital markets transactions
Covenants in debt capital markets transactions

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Covenants in debt capital markets transactions
  • What is a covenant?
  • The use and purpose of covenants in debt capital markets transactions
  • Typical issuer covenants to managers or dealers
  • Effect of breach of issuer's covenants to managers or dealers
  • Typical issuer covenants to holders of securities (and trustee if applicable)
  • Effect of breach of covenants to holders of securities (and trustee if applicable)

What is a covenant?

Covenants, or undertakings as they are sometimes called, are promises to perform or not perform certain actions. A promise to do something is known as a ‘positive covenant’. A promise not to do something is known as a ‘negative covenant’.

The use and purpose of covenants in debt capital markets transactions

In debt capital markets documentation, as in finance documentation generally, covenants are used:

  1. to ensure that the obligor provides information required for monitoring purposes (information covenants)

  2. to set financial targets for the obligor (financial covenants), and

  3. to set the parameters within which the obligor must run its business and deal with its assets and impose other ongoing obligations on the obligor (general covenants)

In addition, an obligor's agreement to repay the debt and, if applicable, to pay interest and any premium, is sometimes called a covenant to pay.

In debt capital markets transactions, an issuer has two separate sets of obligations:

  1. its obligations to the managers (in the case of a standalone issue) or dealers (in the case of an issue under a programme)—these primarily relate to the offering and distribution of the securities and the issuer's state of affairs up to the issue date, do not include a covenant to pay and can be found in the subscription or programme agreement, and

  2. its obligations