Bond Covenant
A condition in a debt agreement restricting the borrower's actions or requiring it to maintain stated financial ratios.
How it is identified
Test: the agreement specifies obligations whose breach constitutes an event of default, whether or not a payment is missed
Unit
qualitative
In depth
Covenants are the lender's protection between payment dates, and they come in two kinds: affirmative, requiring the borrower to do things such as maintain insurance and provide statements, and negative, restricting things such as further borrowing, asset sales or dividend payments. Financial covenants set ratio thresholds — a minimum interest coverage or a maximum debt to EBITDA — and breaching one is an event of default that can accelerate the entire debt even while every payment has been made on time. Covenant strength varies enormously, and weaker packages have become common in easy credit conditions. For a bondholder, the covenant package is as important as the coupon.
Worked example
A covenant requiring interest coverage above 2.0 is breached when operating profit falls from ₹160 crore to ₹70 crore against ₹40 crore of interest, giving 1.75. The lender may demand immediate repayment of the whole facility.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Bond Covenant” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.