When an entity makes a loan, there are loan covenants that the borrower must withstand. These covenants are designed to ensure that the borrower will withstand his long-term commitments to the lending party.
Eitan Eldar explains that the goal in these covenants is to maintain a healthy financial behavior, as reflected in the financial reports. The interest of the borrower is to fulfill the covenants, because his success depends on the loan given to him. Failure to fulfill conditions leads to a threat to the business.
For instance, the lender can demand immediate repayment of debt or payment by guarantors. In some cases, says Eitan Eldar, the lender party and the borrower sign a new deal with other conditions that are considered inferior to the borrower. When a company does not fulfill the covenants set, the behaviour of the banks and the public is affected, especially the company’s shares.