What does the term "covenant" refer to in MandA financing?

The term "covenant" in M&A financing refers to agreements made by the borrower to maintain certain financial ratios or conditions. Covenants are typically included in debt agreements to protect lenders by stipulating specific actions that the borrower must undertake or avoid. These can include maintaining certain levels of liquidity, profitability, or leverage, which are designed to ensure the borrower's financial health and ability to repay the loan.

This mechanism is crucial during the financing of mergers and acquisitions, as it provides a way for lenders to monitor the borrower's ongoing financial performance and mitigate risks associated with the investment. By adhering to these covenants, the borrowing entity demonstrates its commitment to maintaining financial discipline, thereby building confidence with lenders and investors.