Covenant Breach

A contractual clause that limits a party's ability to engage in specified activities, typically restricting competition, solicitation of clients or employees, or use of confidential information after the termination of an employment or business relationship. Restrictive covenants are common in M&A transactions and executive employment agreements, and their enforceability varies significantly across jurisdictions.

A security interest that becomes effective only upon the occurrence of a specified trigger event, such as a covenant breach, a decline in borrower creditworthiness, or the drawing down of a revolving credit facility beyond a certain threshold. Springing liens provide lenders with additional collateral protection when needed while allowing borrowers to operate without encumbered assets during normal business conditions.

The ratio of net operating income to total debt service obligations (principal plus interest payments) over a given period, measuring a borrower's ability to service its debt from operating cash flow. A DSCR above 1.0x indicates sufficient cash flow to meet debt payments, while lenders typically require a minimum DSCR of 1.2x to 1.5x as a loan covenant.

A financial metric measuring the proportion of debt in a company's capital structure relative to its earnings, equity, or assets. The most common leverage ratios in corporate finance and lending include net debt to EBITDA, debt to equity, and debt to total assets.

The ratio of earnings before interest and taxes (EBIT) to interest expense, measuring a company's ability to meet its interest obligations from operating profits. A higher ratio indicates greater financial headroom and lower default risk.

Debt that holds the highest priority claim on specified collateral in the event of default or liquidation, ranking ahead of unsecured and subordinated obligations. Senior secured lenders benefit from security interests over identified assets such as property, equipment, receivables, or intellectual property.

An international regulatory framework developed by the Basel Committee on Banking Supervision that sets minimum capital requirements, leverage ratios, and liquidity standards for banks. Basel III was introduced in response to the 2008 financial crisis and requires banks to hold higher-quality capital (primarily Common Equity Tier 1) against risk-weighted assets, including operational risk and market risk.

Debt that ranks below senior obligations in priority of repayment in the event of the borrower's liquidation or default. Subordinated debt holders are repaid only after senior secured and senior unsecured creditors have been satisfied in full.