High Yield vs. Investment Grade Covenants Chart


There are fundamental differences between the covenants of high yield and investment grade debt securities. While investment grade covenants tend to be less restrictive and more limited, high yield covenants are often much more onerous in large part because of the creditworthiness of the issuer. This checklist outlines key debt covenants and explains their differences. A covenant is a promise to take an action (an affirmative covenant) or to refrain from taking an action (a negative covenant). Negative covenants in bonds are typically based on incurrence tests. These covenants cannot be breached except by incurring or taking some affirmative action, such as incurring debt or a lien or making a restricted payment. On the other hand maintenance covenants must be maintained at all times or at regular intervals, such as maintaining a certain leverage ratio. Covenants in debt securities are almost always incurrence versus maintenance based.