easy · Debt Capital Markets credit-ratings-risk
In the context of credit covenants, what is the primary difference between a maintenance covenant and an incurrence covenant?
- Maintenance covenants govern only interest obligations, while incurrence covenants apply strictly to scheduled principal repayment of the loan.
- Incurrence covenants are more protective for lenders because they catch a deterioration in the borrower's business performance much earlier than other terms.
- Maintenance covenants are found exclusively in high-yield bond indentures, while incurrence covenants are the standard feature used in syndicated bank loans.
- Maintenance covenants are tested periodically regardless of company action, while incurrence covenants are only tested when a specific event occurs.
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