Loan Covenants
From Open Risk Manual
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Definition
Loan Covenants are a collection of possible clauses in a bilateral Loan contract which typically aim to mitigate Credit Risk for the lender.
Typical Covenants
Covenants can take any agreed shape and may reflect the specific circumstances of the lending relationship, the project being financed etc.
Some typical clauses involve trigger events linked to standard ratios such as
- Loan to Value Ratio (LTV) is the ratio of a loan to the value of the collateral purchased
- Interest Coverage Ratio (ICR) is the ratio of earnings before interest and tax to the interest expense in the same period
- Debt Service Coverage Ratio (DSCR) is the ratio of annual net operating income to debt obligations owed in the last 12m
The triggering of a loan covenant means the terms of the loan repayment are accelerating and may be placing other legal restrictions on the possible actions of the borrower
