Debt Incurrence Covenant
How loan and bond agreements restrict taking on new debt, and why the definition of debt is where the real fight is.
- How debt is defined and what it sweeps in
- Whether existing debt is scheduled and permitted
- Whether purchase-money and lease financing are carved out
- Whether any incurrence test is achievable
If this clause already feels aggressive in isolation, upload the full contract and see how it combines with payment terms, liabilities, and exit rights.
Analyze My ContractWhat this clause actually does
Incurring additional debt is one of the main ways a borrower becomes less creditworthy, so credit agreements restrict it. Maintenance covenants, common in bank deals, permit set debt levels at all times. Incurrence covenants, common in bonds, permit more debt only if a financial test is met on a pro forma basis. The whole covenant turns on the definition of debt, which often sweeps in letters of credit, capitalized leases, and guarantees, items not traditionally thought of as debt.
Why people get burned by this clause
An over-broad debt definition can put a company in default for ordinary obligations, while a weak one lets a borrower load up on debt that erodes a lender's position. The carveouts decide whether the business can actually fund itself.
What should make you slow down
- A debt definition that sweeps in trade payables or ordinary-course items
- No carveout for purchase-money or capitalized-lease financing
- No exception for existing scheduled debt
- An incurrence test the borrower cannot realistically satisfy
Where you usually see it
- Bank credit agreements
- Bond and note indentures
- Mezzanine and private debt agreements
What the platform checks in the live contract
- How debt is defined and what it sweeps in
- Whether existing debt is scheduled and permitted
- Whether purchase-money and lease financing are carved out
- Whether any incurrence test is achievable
What to test against your deal
- Trade payables incurred in the ordinary course are excluded from debt
- Existing debt is scheduled and grandfathered
- A basket permits purchase-money and capitalized-lease financing
- Any incurrence test is set with realistic headroom
Definitions worth opening next
Clause pages that share the risk pattern
Articles that go deeper
Debt covenants stop a borrower from taking on debt that weakens the lender's position. The fight is in the definition of debt and its carveouts. Watch for definitions that capture ordinary obligations and for the absence of purchase-money and existing-debt exceptions.
See how this clause behaves in the real contract.
The clause library gives you a starting point. Document analysis can surface relevant language, show related sections, and organize risk signals and follow-up questions for review against the source file.