Covenant

Definition : Covenants are special clauses accompanying the bank loan. There are positive covenants, negative covenants, pari passu covenants, and cross-default covenants.
Positive Covenants : Positive covenants are a borrower's commitments to comply with certain capital structure or earnings ratios, to adopt a given legal structure or even to restructure. Positive covenants are also called affirmative covenants.
Negative Covenants : Negative covenants can limit the dividend payout, prevent the company from pledging certain assets to third parties (negative pledges) or from taking out new loans or engaging in certain equity transactions, such as share buybacks.
Pari Passu Covenants : Pari passu covenants are clauses whereby the borrower agrees that the lender will benefit from any additional guarantees the borrower may give on future loans it raises.
Cross-Default Covenants : Cross default covenants specify that if the company defaults on another loan, the loan which has a cross default clause will become payable even if there is no breach of covenant or default of payment on this loan.