Incurrence Covenant
Corporate Credit Analysis glossary · Credit Agreements & Covenants
Definition
A covenant tested only when the borrower takes a specified action (issue debt, pay dividend, sell asset), not continuously. Standard in high-yield indentures; absence of maintenance covenants is the defining feature of cov-lite.
Incurrence Covenant in plain English
A covenant is just a promise a borrower makes to lenders about how it will behave. An incurrence covenant is a promise that only gets checked when the company tries to do something specific — borrow more money, pay its owners a dividend, or sell off a big asset — rather than being monitored all the time. Its opposite, a "maintenance" covenant, forces the company to stay healthy continuously (like keeping its debt below a limit every quarter), and loans that skip those ongoing check-ups are nicknamed "cov-lite." It's the difference between a gym membership that only ID-checks you when you try to bring a guest versus one that weighs you every single week.
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Practice Incurrence Covenant
A bond indenture allows the borrower to operate without… How should this covenant be classified?
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