Incurrence covenant
What is an incurrence covenant, and how is it different from a maintenance covenant?
ONE OF 366 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
An incurrence covenant is a financial test a borrower must pass only when it wants to do something the lender has restricted, such as borrowing more, paying a dividend, making an acquisition or granting security, rather than at every quarter end. If new debt is allowed only while leverage stays at or below 4.0x, a company with EBITDA of US$25m and debt of US$80m can add up to US$20m, because US$100m is four times US$25m; if it does not borrow, the test does not apply. It is usual in high-yield bonds and covenant-lite loans, and it lets a business deteriorate without breaching anything.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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// NEXT TO IT
- Covenant headroom
- Negative pledge
- Condition precedent (CP)
- Event of default
- Covenant waiver
- Reservation of rights
- Term sheet
- Condition subsequent
- Review event
- Repayable on demand
- Material adverse change (MAC) clause
- Cross-default
- Change of control clause
- Cure period
- Compliance certificate
- Information undertakings
- Liquidity covenant
- Equity cure
- Springing covenant
- Covenant reset
- Covenant mulligan
- Covenant-lite (cov-lite)
- Test date (covenant)
- Permitted baskets
- Distribution lock-up
- Mandatory prepayment
- Clean-up period
- Certain funds
- Yank-the-bank clause (replacement of lender)
- Capex covenant
- Guarantor coverage test
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