M&A
Covenant
Definition
A condition in a loan or bond agreement that the borrower must satisfy, commonly a maximum leverage ratio or a minimum interest cover. Breach gives lenders rights, including the right to demand repayment.
Why it matters
Covenants are where financial pressure becomes an event. A business can operate at a loss for a long time provided it holds cash, but a covenant breach hands lenders a decision, and that decision may arrive long before the company would otherwise have run out of room.
The usual outcome is negotiation rather than enforcement. Lenders grant a waiver, reset the level or amend terms in exchange for fees, a higher margin or additional security, so a breach frequently surfaces in disclosure as a technical matter that has already been resolved. It is nonetheless a signal, because it establishes that the company's performance has moved outside the range its financing assumed.
For gambling operators the risk concentrates around structural change. A lost concession, a licence not renewed or a duty increase can move earnings enough to breach a leverage covenant in a single reporting period.
The bottom line
A covenant converts underperformance into a deadline. The question is never only whether a company is losing money but whether losing it breaks an agreement.