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A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.
Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called.
Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender.
A good example for understanding Loan Covenants would be syndicate loans. Where several banks act as party to loans and borrower may be one or several.
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