Outline common loan covenants and provide examples.

• A. Negative covenants (no additional debt), Affirmative covenants (financial reporting), Financial covenants (DSCR, liquidity), Cross-default, Change in control.
• B. Marketing covenants.
• C. No covenants at all.
• D. Supply-chain covenants.

Answer: (A)

Loan covenants are contractual promises that govern what a borrower can and must do during the life of a loan, protecting the lender by reducing risk. The core types you’ll see are negative covenants, which limit certain actions the borrower may take—like incurring additional debt, creating liens, or selling key assets without consent. Affirmative covenants require the borrower to take specific actions, such as providing regular financial reporting, maintaining insurance, and staying compliant with laws. Financial covenants set measurable tests the borrower must meet over time, for example maintaining a minimum debt-service coverage ratio or ensuring liquidity above a certain level. Cross-default is a provision that ties this loan to other indebtedness, so a default on another loan can trigger a default here as well. Change in control is a covenant that can require lender approval or accelerate the loan if the borrower’s ownership or control changes hands, protecting the lender from shifts in risk.

These categories collectively cover the common protections lenders seek: limiting risky moves, ensuring ongoing transparency and compliance, monitoring financial health with concrete metrics, and addressing larger risk events like other defaults or ownership changes. While other ideas like marketing or supply-chain covenants might appear in specialized agreements, they are not the standard framework for the typical loan covenants described here, and having no covenants at all would leave the lender unprotected.