List common covenants in commercial loan agreements and give examples.

• A. Financial covenants (DSCR, leverage), liquidity ratios; affirmative covenants (financial statement delivery), negative covenants (no new debt), capex restrictions, debt incurrence, change in control
• B. Personal guarantees
• C. Trademark restrictions
• D. Environmental covenants only

Answer: (A)

Covenants are contractual controls lenders use to protect themselves by guiding what a borrower can or must do during the loan term. The most common covenants fall into three broad groups. Financial covenants require maintaining certain financial measures, such as a debt service coverage ratio or leverage ratio, and sometimes liquidity thresholds, so the borrower remains able to meet debt obligations. Affirmative covenants obligate the borrower to take specific actions, like delivering financial statements on a schedule, maintaining insurance, or notifying the lender of material events. Negative covenants restrict certain actions, such as incurring additional debt, making large asset disposals, or placing liens on assets. Additional typical restrictions include capex controls that limit capital expenditures, debt incurrence clauses that cap taking on new borrowings, and change in control provisions that can trigger default or renegotiation if ownership changes.

Personal guarantees are not covenants themselves; they’re guarantees backing the loan. Trademark restrictions are not standard covenants in the typical set, and environmental covenants, while possible in some financings, do not by themselves comprise the broad, common covenant framework. The first group reflects the broad, common covenant categories lenders rely on to monitor and control risk.