What are non-financial debt covenants?

What are non-financial debt covenants?

Non-financial covenants are provisions that govern corporate behavior and actions taken by management aside from operational performance measures. For example, this could be the prohibition of borrowing additional debt, restrictions of liens, or financial reporting requirements.

What are the types of debt covenants?

In loan covenants, there are three commonly known types of agreements: affirmative loan covenants, negative loan covenants, and financial loan covenants.

What are restrictive covenants in debt contracts?

A restrictive covenant, also known as a negative covenant, is any type of agreement in a contract or obligation that restricts the buyer from taking some action or requires they abstain from a specific action.

Which of the following is a non-financial covenant?

Restriction on investment activities, be it on capital assets, real estate, shares, and debentures, etc., without the lender’s permission. Restriction on dividend distribution. Restriction on the sale of assets without consulting the lender.

What are non-financial measures?

Non-financial metrics are quantitative measures that cannot be expressed in monetary units. Outcome-based measures such as customer satisfaction, market share, category ownership, and new product adoption rate fall into the non-financial metrics.

What are the two types of debt covenants?

There are generally 2 types of loan covenants: positive and negative. Terms stated in loan agreements that deal with a company’s financial performance, whether negative or positive, usually are referred to as financial covenants.

What happens if a debt covenant is violated?

Covenant violations often result in the lender obtaining the right to call or demand early repayment of the loan, impose additional fees, and/or modify the terms of the debt instrument.

How do debt covenants work?

Debt covenants are restrictions that lenders. (creditors, debt holders. These bond issuers create bonds to borrow funds from bondholders, to be repaid at maturity., investors) put on lending agreements to limit the actions of the borrower (debtor).

What happens when debt covenants are violated?

What are some examples of restrictive covenants?

Examples Of Restrictive Covenants

  • Limitations On Home Color.
  • Rent And Lease Restrictions.
  • Restrictions On Business Usage.
  • Limitations On Permissible Pets.
  • Requirements For Exterior Maintenance.
  • Restrictions On Exterior Constructions.

What do you need to know about debt covenants?

In other words, debt covenants are agreements between a company and its lenders that the company will operate within certain rules set by the lenders. They are also called banking covenants or financial covenants. Debt covenants are not used to place a burden on the borrower.

What are the different types of non financial covenants?

Non-financial covenants are promises or agreements made by the borrowing party that are not financial in nature. The promises are either operational, ownership-related, positive or negative covenants, legal-related, and so on. Non-financial covenants also serve the purpose of a safety net to the lender.

When does a debt covenant violation become noncurrent?

If a debt covenant violation is timely cured within a grace period, then the debt is no longer callable and will, therefore, remain long-term. Noncurrent classification is also appropriate if the creditor provides a waiver that extends more than one year beyond the balance sheet date.

What are some examples of negative debt covenants?

Negative debt covenants are covenants that state what the borrower cannot do. For example: Pay cash dividends over a certain amount or predetermined threshold Sell certain assets Borrow more debt Issue debt more senior than the current debt Enter into certain types of agreements or leases Partake in certain M&A