Definition of Protective covenant

Protective covenant

A part of the indenture or loan agreement that limits certain actions a company takes
during the term of the loan to protect the lender's interests.

protective covenant

Restriction on a firm to protect bondholders.

Affirmative covenant

A bond covenant that specifies certain actions the firm must take.

Bond covenant

A contractual provision in a bond indenture. A positive covenant requires certain actions, and
a negative covenant limits certain actions.

Covenants

Provisions in a bond indenture or preferred stock agreement that require the bond or preferred
stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified
actions (negative covenants).

Negative covenant

A bond covenant that limits or prohibits altogether certain actions unless the bondholders agree.

Positive covenant (of a bond)

A bond covenant that specifies certain actions the firm must take. Also called
and affirmative covenant.

Protective put buying strategy

A strategy that involves buying a put option on the underlying security that is
held in a portfolio. Related: Hedge option strategies

Restrictive covenants

Provisions that place constraints on the operations of borrowers, such as restrictions on
working capital, fixed assets, future borrowing, and payment of dividend.

Financial Covenant

A feature of a debt or credit agreement that is designed to protect the lender or creditor. It is common to characterize covenants as either positive or negative covenants.
A positive covenant might require that the debtor maintain a minimum amount of working capital.
A negative covenant might limit dividend payments that may be made.

Loan Covenants

Express stipulations included in loan agreements that are designed to monitor
corporate performance and restrict corporate acts, affording added protection to the lender.

Negative Loan Covenants

Loan covenants designed to limit a corporate borrower's behavior
in favor of the lender.

Positive Loan Covenants

Loan covenants expressing minimum and maximum financial measures
that must be met by a borrower.

Covenants

Promise usually made in a contract whereby a party to the contract promises to do or not to do specified things.

Financial Covenants

A promise made related to financial conditions or events. Often a promise not to allow certain balance sheet items or ratios to fall below an agreed level. Usually found in loan documents, as a protection mechanism.

Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. protective
covenants work to resolve these conflicts.

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