Which covenant requires maintaining a minimum DSCR?

• A. Negative covenant
• B. Affirmative covenant
• C. Financial covenant
• D. Cross-default

Answer: (C)

The idea being tested is how lenders use covenants to monitor a borrower’s ability to repay. DSCR, or debt service coverage ratio, compares the cash available to service debt with the debt service that must be paid. Requiring a minimum DSCR is a financial covenant because it sets a quantitative financial target that the borrower must maintain; it directly ties the loan’s safety to the borrower’s ongoing cash flow. If the DSCR falls below the threshold, the covenant is breached, signaling potential risk to the lender.

The other types don’t focus on a financial metric: a negative covenant restricts certain actions the borrower may take (like taking on new debt), an affirmative covenant requires the borrower to perform certain actions (like keeping insurance or providing financial statements), and cross-default triggers a default if another loan is in default.