Which covenants are typically described as incurrence covenants?

Which covenants are typically described as incurrence covenants?

• A. Maintenance covenants require maintaining ratios
• B. Incurrence covenants prohibit actions unless triggered
• C. Covenants that require payment of dividends
• D. Negative covenants on equity issuance

Answer: (B)

Incurrence covenants are restrictions that only bite when you take a specific action, like issuing new debt or making a large restricted payment. They set tests that must be met at the moment you incur or undertake that action; if you pass, you may proceed, if you don’t, the action is blocked. This gate-like nature—prohibiting actions unless the triggering conditions are satisfied—defines incurrence covenants. Maintenance covenants, by contrast, are ongoing requirements to keep certain financial ratios or conditions, tested regularly regardless of any new action. The other examples describe different types of covenants (dividend-related or equity issuance restrictions), but they aren’t the typical incurrence covenants whose effect activates only at the point of incurring a new action.

Incurrence covenants are restrictions that only bite when you take a specific action, like issuing new debt or making a large restricted payment. They set tests that must be met at the moment you incur or undertake that action; if you pass, you may proceed, if you don’t, the action is blocked. This gate-like nature—prohibiting actions unless the triggering conditions are satisfied—defines incurrence covenants.

Maintenance covenants, by contrast, are ongoing requirements to keep certain financial ratios or conditions, tested regularly regardless of any new action. The other examples describe different types of covenants (dividend-related or equity issuance restrictions), but they aren’t the typical incurrence covenants whose effect activates only at the point of incurring a new action.