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,