Incurrence Covenants

This question tests your understanding of a core lender protection in leveraged finance, where covenant compliance is checked only when the borrower wants to do something that could increase risk. You need to know how these covenants are used to limit actions such as taking on more debt, making acquisitions, selling important assets, or paying cash out to shareholders, and why lenders care about those actions. Interviewers ask this because covenants are central to how credit agreements balance borrower flexibility with downside protection, and a candidate should be able to explain the purpose of the restriction, the types of transactions it covers, and how it affects a company’s financial and strategic choices.