Maintenance Covenant
Definition
A maintenance covenant is a financial covenant tested on a regular schedule (typically quarterly) regardless of what the borrower does — for example, maximum net leverage of 5.0x or minimum interest coverage of 2.5x. If results deteriorate below the required level, the borrower breaches even without taking any action.
Maintenance covenants give lenders an early-warning tripwire and a seat at the table: a breach is an event of default (after any cure rights, including equity cure provisions letting sponsors inject equity to fix the ratio), which lenders usually resolve via amendment and waiver fees, tighter pricing, or restructuring negotiations.
They survive mainly in pro rata bank facilities (revolvers, Term Loan As) and middle-market/private credit deals; large institutional term loans are mostly covenant-lite, often with only a springing maintenance covenant tied to revolver utilization.
Why interviewers ask
Interviewers test the maintenance/incurrence distinction and follow up with "what happens when a company breaches?" — the expected answer covers default, waiver negotiations, equity cures, and lender leverage. It is core vocabulary for leveraged finance and restructuring.
Related terms
Interviews don't test definitions — they test recall under pressure.
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