Question

Which of the following is NOT an example of negative debt covenants?

Question 20 options:

1)	Specifying a minimum debt service cover.

2)	Restrictions on amalgamation with other companies.

3)	Supplying creditors with annual audited reports.

4)	Limiting annual dividend payments to shareholders.

Answer 1

Option 3) Supplying creditors with annual audited reports.

Debt covenants are sort of restrictions that lenders (creditors or investors) put on lending agreements to limit the actions of the borrower (debtor). Alternatively, debt covenants are agreements between a company and its lenders that the company will operate within certain rules set by the lenders. All the above options except option 3 are reflecting some sort of action that may have implication on debt becoming a bad debt. That's why they are debt covenants.