Venture Capital and Private Equity
Covenants are legally binding agreements or clauses included in loan agreements and bond indentures that impose certain restrictions or obligations on borrowers to protect the interests of lenders. These provisions can dictate financial performance metrics, operational activities, and other specific requirements that must be adhered to by the borrowing entity, making them a crucial component in maintaining financial discipline within leveraged buyouts (LBOs). Understanding covenants is essential as they help mitigate risks associated with high leverage by ensuring that companies remain financially stable and can meet their debt obligations.
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