Loan covenants in project finance
Loan covenants are the promises a borrower makes in the loan agreement. They come in three broad kinds: financial covenants, information covenants, and general undertakings, which are the affirmative and negative things the borrower must and must not do.
The three kinds of covenant
Financial covenants and the ratios
Financial covenants are often set as ratios the project must maintain. Two common ones in project finance:
- Debt service coverage ratio (DSCR): the cash a project generates in a period against the debt service due in that period. A DSCR above the agreed minimum means the project can cover its debt.
- Loan life coverage ratio (LLCR): the value of the cash the project is expected to generate over the life of the loan against the debt outstanding. It looks forward across the whole loan, where DSCR looks at a single period.
These ratios are calculated in the project's financial model. Capital Governance does not compute ratios or model cashflows. What it does is track the covenant as an obligation: the requirement to deliver a compliance certificate confirming the ratio each period, when it is due, and whether it has been provided and accepted. The maths stays in the model. The obligation and its evidence live in the register.
How covenant compliance is evidenced
Most financial and information covenants are evidenced through a periodic compliance certificate: the borrower confirms it is meeting its covenants, includes the calculated figures, and delivers it to the lenders or the facility agent by a set date. A late or missing certificate is itself a problem, and a covenant that is breached can, after any cure period, become an event of default. What matters operationally is that everyone can see what is due, when, and whether it has arrived.
Where Capital Governance fits
Capital Governance tracks the covenant and reporting obligations, not the calculations. Each undertaking, each information requirement and each compliance certificate sits in the shared register with a due date, an owner and a status, and the confirmation trail behind it. The developer, the funders and the facility agent see the same picture of what has been delivered and what is outstanding, without rebuilding it from email.