Financial maintenance covenants typically require ongoing financial performance. Which of the following is an example?

• A. Covenants requiring ongoing financial performance; examples include minimum DSCR, minimum tangible net worth, cap on indebtedness, and limits on capital expenditures.
• B. Covenants that set only collateral requirements and asset restrictions.
• C. Non-financial covenants that don't affect cash flow.
• D. Covenants that apply only to equity holders and not debt terms.

Answer: (A)

Maintenance covenants are loan terms that require the borrower to continue meeting financial targets over the life of the loan, to protect the lender by ensuring ongoing creditworthiness and cash flow adequacy. They’re typically tied to measurable performance metrics that can be monitored over time, such as a minimum debt service coverage ratio, a minimum tangible net worth, caps on total indebtedness, and limits on capital expenditures. These are classic examples of ongoing financial performance requirements, because they force the borrower to maintain a certain level of cash flow and financial health to stay in compliance. The other options describe covenants that aren’t about ongoing financial performance: collateral requirements and asset restrictions focus on securing the loan with assets, non-financial covenants don’t tie to cash flow metrics, and covenants that apply only to equity holders don’t address the debt terms.