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Financial covenant

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  1. A covenant that specifies a financial ratio or test. If the financial ratio test is not met or exceeded, then an event of default occurs.
  2. Examples of financial covenants include minimum net worth tests and the ratio of EBIT or EBITDA to interest expense.
  3. Typically, breach of a financial covenant results in an immediate event of default that gives the lender the right to accelerate the maturity of the loan or other obligation.
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