Incurrence Covenant
Private Credit glossary · Documentation, Covenants & Terms
Definition
Covenant tested only when the borrower takes a specified action (incurring new debt, paying a dividend, making an acquisition, making a restricted payment). Contrast with a maintenance covenant, which is tested every quarter regardless of borrower behavior. Incurrence covenants are universal in high-yield bonds and BSL TLBs but offer the lender no early warning during deterioration — the borrower can stay passive and the covenant never runs.
Incurrence Covenant in plain English
A covenant is just a promise a borrower makes to a lender in the loan contract. An incurrence covenant is a promise that only gets checked when the borrower tries to DO something big — like borrow more money, pay its owners a dividend, or buy another company. Think of a rule that says 'you may only take out a new loan IF you can still afford it' — but nobody checks unless you actually apply for that new loan. The catch for lenders: if the borrower just sits still while its business quietly falls apart, this kind of covenant never triggers, so it gives no early warning that trouble is brewing (unlike a 'maintenance' covenant, which is tested every three months no matter what).
Related Private Credit terms
Private Credit practice questions · Private Credit flashcards · Private Credit study guide