Global Definitions Database

Loan covenants are stipulations in a commercial loan or bond issue that require the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions or possibly restricts certain activities to circumstances when other conditions are met.

Typically, violation of a covenant may result in a default on the loan being declared, penalties applied or the loan being "called", meaning all future payments due under the loan are deemed to be due and payable immediately.

The loan documents typically have provisions to specify soft vs. hard covenants, testing periods, cure methods (if any), and extension options.

Typical covenants for real estate related loans stipulate to minimum/ maximum Loan to Value Ratio (LTV), Debt Service Coverage Ratio (DSCR) and Interest Service Coverage Ratio (ISCR).