Covenant Breach

Definition

A violation of a financial or operational condition specified in a loan agreement, which may trigger a range of lender remedies including increased interest rates, acceleration of repayment, additional collateral requirements, or declaration of an event of default. Financial covenant breaches most commonly involve failure to maintain minimum debt service coverage ratios, maximum leverage ratios, or minimum net worth requirements. Covenant breaches do not necessarily lead to immediate loan recall but significantly alter the borrower-lender relationship.