Debt Incurrence Covenant

Typically seen in high yield bonds but increasingly in senior secured loans in lieu of maintenance covenants. These covenants are only tested when the company takes an affirmative action, such as incurring additional debt or making a restricted payment. An agreed financial ratio such as senior or total debt to EBITDA is typically used to prevent the borrowing company from incurring more debt (by issuing further loans and/or bonds) if this ratio is not maintained. Restricted payments such as dividends to equity holders are typically subject to an interest, cashflow or earnings-based ratio.

Capital at risk. No FSCS cover. See Risk Statement.