What is the difference between maintenance and incurrence covenants?
Credit documentation basics.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Maintenance covenants must be met at every test date — usually quarterly — for example net leverage below 4.5x; a breach is a default. Incurrence covenants are tested only when the company wants to do something — borrow more, pay a dividend, sell assets — and block that action unless a ratio is met; missing the ratio in a bad quarter isn't a default.
The full answer
| Maintenance | Incurrence | |
|---|---|---|
| Tested | Every quarter | Only when taking an action |
| Typical tests | Net leverage, interest cover, fixed-charge cover | Debt incurrence (e.g. interest cover ≥ 2x), restricted payments |
| Breach | Event of default (usually waived for a fee or amended) | The action is blocked |
| Found in | Bank loans, private credit | High-yield bonds, cov-lite loans |
Why it matters
Maintenance covenants give lenders an early warning and a seat at the table when performance slips. Incurrence covenants leave the company more room in a downturn — and give lenders less early warning. "Headroom" — the cushion between the business plan and the covenant level — is typically 20–35%.
Mistakes to avoid
Saying an incurrence covenant breach is a default.
Follow-ups they may ask
Log in to keep track of the questions you’ve mastered.