What is a Maintenance Covenant in financial agreements?

A Maintenance Covenant is indeed a requirement that must be met to avoid default. Maintenance covenants are typically included in loan agreements and bond indentures, and they are designed to ensure that the borrower maintains certain financial metrics and operational thresholds. These can include requirements related to financial ratios, such as debt-to-equity or interest coverage ratios, which a borrower must adhere to throughout the term of the loan or bond agreement.

If the borrower fails to comply with these covenants, it can lead to a default event, allowing lenders to take corrective measures, such as demanding immediate repayment or restructuring the agreement. The goal of these covenants is to protect the interests of the lenders by ensuring that the borrower's financial condition remains stable enough to meet repayment obligations. This contrasts with the other options, which do not accurately define the role or purpose of a maintenance covenant in financial agreements.