Bond terms explained: Covenant

A covenant refers to the terms and conditions that get attached to a bond issue, and as such you need to think of covenant as agreement which is simply what the word means.

There are various elements that can be part of the covenant.

One is called the negative pledge which is on the Euromarkets, is means the borrower will refrain from getting finance from the granting of a better security (from the point of view of the investor).

There is a cross default caluse too and says if the borrower defaults on any loan it will mean a default on this particular one too.

There are also other types of covenant terms to understand such as pari passu which sounds exotic, and also restrictive financial covenants too which are very difficult to get enforced however so the borrower often ignores these or tries to resist them.

Other things to look at include new owner clauses, nature of business clauses, and to understand also the events of default.

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