Listen to a Business English Dialogue About Protective covenant
Alexander: Hi Danielle, do you know about protective covenants in business and finance?
Danielle: Yes, I think they’re clauses in loan agreements or bond indentures that impose restrictions on borrowers to protect lenders’ interests.
Alexander: That’s correct. Protective covenants can include requirements for maintaining certain financial ratios, limitations on additional debt issuance, or restrictions on asset sales.
Danielle: Can you explain why protective covenants are important for lenders?
Alexander: Sure, protective covenants help lenders mitigate risks by ensuring that borrowers maintain financial health and do not engage in activities that could jeopardize their ability to repay the loan or meet their obligations.
Danielle: Are there different types of protective covenants?
Alexander: Yes, there are affirmative covenants that require borrowers to take certain actions, such as providing financial statements, and negative covenants that restrict borrowers from taking certain actions, such as incurring additional debt without lender approval.
Danielle: How do protective covenants benefit borrowers?
Alexander: Protective covenants can provide borrowers with access to financing at lower interest rates or under more favorable terms by assuring lenders of their commitment to sound financial management.
Danielle: Can protective covenants be customized for specific loan agreements?
Alexander: Yes, protective covenants can be tailored to suit the needs and risk preferences of both lenders and borrowers, depending on the nature of the financing and the creditworthiness of the borrower.
Danielle: How do borrowers ensure compliance with protective covenants?
Alexander: Borrowers typically monitor their financial performance regularly and take proactive measures to stay in compliance with the terms of the loan agreement, such as adjusting operations or seeking waivers if necessary.
Danielle: What happens if a borrower breaches a protective covenant?
Alexander: If a borrower breaches a protective covenant, it may trigger a default under the loan agreement, allowing lenders to take remedial actions such as accelerating repayment, imposing penalties, or even seizing collateral.
Danielle: Thanks for explaining, Alexander. Protective covenants seem like an important tool for managing risks in lending.
Alexander: Absolutely, Danielle. Protective covenants help ensure the stability and security of lending relationships by establishing clear expectations and safeguards for both lenders and borrowers.