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What are debt covenants?

A debt covenant is typically attached to any loan agreement between a lender and a borrow. Debt covenants are basically rules that the borrower must follow. If the borrow doesn’t follow the rules, then they would violate their debt covenants, which could require the borrower to repay the loan in full immediately.

Some common examples of ratios/metrics included in debt covenants include debt to EBITDA, debt to equity, total assets, etc. For example, the debt covenant could say that the borrow must maintain a debt to EBITDA ratio that is greater than 5.0. If the ratio drops below 5.0, then the borrow would be in default of the debt covenants.

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