Term · Balance Sheet & Debt
Covenant
In briefA covenant is a contractual obligation in loan or bond agreements, such as maintaining certain financial ratios or refraining from certain actions. For small-caps with little refinancing flexibility, a breach can quickly become existential.
Definition
A contractual obligation in loan or bond agreements, such as maintaining certain financial ratios or refraining from certain actions.
How it is calculated
Formula. No single formula; frequently Net Debt/EBITDA, interest coverage, minimum liquidity.
Why it matters for small caps
In the small-cap space, companies have less refinancing headroom; covenant breaches can quickly become existential.
Common misreadings
- It is only noticed once breached; the headroom analysis must be done beforehand.
In the process
Frequently asked
What is a covenant?
It is an obligation set out in a loan or bond agreement. It binds the borrower to ratios or rules of conduct.
Which covenants are common?
Common ones are limits on Net Debt/EBITDA, a minimum interest coverage, or a minimum liquidity. There is no uniform formula.
Why should you check covenants before a breach?
They are often only noticed once they are violated. But the analysis of the buffer (headroom) must be done beforehand to identify risks early.
Related terms
Sources
Primary
Bundesministerium der Justiz – Aktiengesetz (AktG)
https://www.gesetze-im-internet.de/aktg/
https://www.gesetze-im-internet.de/aktg/
Methodology
EUR-Lex – EU-Prospektverordnung, Verordnung (EU) 2017/1129
https://eur-lex.europa.eu/eli/reg/2017/1129/oj
https://eur-lex.europa.eu/eli/reg/2017/1129/oj
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.