1

covenant

noun cov·e·nant \ ˈkəv-nənt , ˈkə-və- \
Updated on: 12 Nov 2017

Definition of covenant

1 : a usually formal, solemn, and binding agreement : compact
  • … international law, which depends upon the sanctity of covenants between rulers.
  • —George H. Sabine
2 a : a written agreement or promise usually under seal between two or more parties especially for the performance of some action
  • the deed conveying the land contained restrictive covenants
b : the common-law action to recover damages for breach of such a contract

covenantal

play \ˌkə-və-ˈnan-tᵊl\ adjective

Examples of covenant in a Sentence

  1. an international covenant on human rights

  2. The restrictive covenants of the building development prohibit the construction of buildings over 30 feet tall.

Recent Examples of covenant from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'covenant.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of covenant

Middle English, from Anglo-French, from present participle of covenir to be fitting, from Latin convenire


2

covenant

verb cov·e·nant \ ˈkəv-nənt , -ˌnant , ˈkə-və- \

Definition of covenant

transitive verb
: to promise by a covenant : pledge
intransitive verb
: to enter into a covenant : contract

Examples of covenant in a Sentence

  1. a traditional rule held that a husband could not enter into a covenant with his wife, because that was the equivalent of covenanting with himself

  2. the home buyers had to covenant that they would restore and keep the house for at least 10 years in exchange for a low mortgage rate

Recent Examples of covenant from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'covenant.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of covenant

covenant Synonyms


Financial Definition of COVENANT

covenant

What It Is

A covenant is a promise a company makes, usually in return for a loan or bond issue.

How It Works

Covenants are most common in lending agreements and bond indentures. They can be financial or operational in nature.

Operational covenants often require borrowers to maintain their physical assets to certain standards, meet minimum disclosure requirements, engage only in permissible business lines, or maintain a certain level of insurance.

Financial covenants are frequently ratios that the borrower is required to stay above or below (a 2:1 debt-to-equity ratio or interest coverage ratio, for example), but there are usually also restrictions on debt levels and minimum working capital requirements. Financial covenants often limit the borrower's purchase of new assets, changes in control, the use of the borrowed funds, and the payment of dividends (so that shareholders cannot vote to pay themselves huge dividends, leaving nothing for the creditors). Some may also limit compensation packages for officers.

The lending agreement in which the covenant appears will also provide detailed formulas to be used to calculate the ratios and limits. It is important to note that in many cases these formulas do not conform to generally accepted accounting principals (GAAP). For example, the covenant may include leases in the debt calculation, or it may consider capital leases as an expense. As a result, it is very important that borrowers scrutinize covenants before borrowing.

Violating a covenant can trigger a technical default. This means that although the issuer is making interest and principal payments on time, it is not operating within the agreed-upon guidelines and is thus increasing the risk of default in the eyes of the lender or bondholders. Often borrowers have a certain amount of time to remedy the technical default, but it often lowers the borrower's credit rating and stock price.

Why It Matters

Lenders attach covenants to bond issues and loans as a way to force the borrower to operate in a financially prudent manner that ensures it will repay the debt. Issuers, on the other hand, usually negotiate the most flexible covenants they can so they have the freedom to make decisions and take risks that might ultimately benefit the shareholders.  In either case, covenants act as a safety mechanism that allows both parties to achieve its goals.


COVENANT Defined for English Language Learners

covenant

noun

Definition of covenant for English Language Learners

  • : a formal and serious agreement or promise

  • law : a formal written agreement between two or more people, businesses, countries, etc.


COVENANT Defined for Kids

covenant

noun cov·e·nant \ ˈkə-və-nənt \

Definition of covenant for Students

: a formal or serious agreement or promise
  • the covenant of marriage

Law Dictionary

covenant

noun cov·e·nant \ ˈkə-və-nənt \

legal Definition of covenant

1 : an official agreement or compact
  • an international covenant on human rights
2 a : a contract in its entirety or a promise within a contract for the performance or nonperformance of a particular act
  • a covenant not to sue
; specifically : a promise relating to the transfer, possession, or ownership of real property — see also covenant not to compete, restrictive covenant
b : a warranty in a deed assuring the grantee especially against defects in title
  • a covenant for quiet enjoyment
— see also run
3 : a common-law action to recover damages for breach of a contract under seal — compare assumpsit, debt

covenant

verb


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