Definition of Restrictive covenants

Restrictive covenants

Provisions that place constraints on the operations of borrowers, such as restrictions on
working capital, fixed assets, future borrowing, and payment of dividend.

Covenants

Provisions in a bond indenture or preferred stock agreement that require the bond or preferred
stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified
actions (negative covenants).

Loan Covenants

Express stipulations included in loan agreements that are designed to monitor
corporate performance and restrict corporate acts, affording added protection to the lender.

Negative Loan Covenants

Loan covenants designed to limit a corporate borrower's behavior
in favor of the lender.

Positive Loan Covenants

Loan covenants expressing minimum and maximum financial measures
that must be met by a borrower.

Covenants

Promise usually made in a contract whereby a party to the contract promises to do or not to do specified things.

Financial Covenants

A promise made related to financial conditions or events. Often a promise not to allow certain balance sheet items or ratios to fall below an agreed level. Usually found in loan documents, as a protection mechanism.

Back-to-back loan

A loan in which two companies in separate countries borrow each other's currency for a
specific time period and repay the other's currency at an agreed upon maturity.

Broker loan rate

Related: Call money rate.

Builder buydown loan

A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Bullet loan

A bank term loan that calls for no amortization.

Dealer loan

Overnight, collateralized loan made to a dealer financing his position by borrowing from a
money market bank.

Equivalent loan

Given the after-tax stream associated with a lease, the maximum amount of conventional
debt that the same period-by-period after-tax debt service stream is capable of supporting.

Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
Federal Home loan Banks play a role analogous to that played by the Federal Reserve Banks vis-à-vis
member commercial banks.

Fixed-rate loan

A loan on which the rate paid by the borrower is fixed for the life of the loan.

Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.

Intercompany loan

loan made by one unit of a corporation to another unit of the same corporation.

Inventory loan

A secured short-term loan to purchase inventory. The three basic forms are a blanket
inventory lien, a trust receipt, and field warehousing financing.

Jumbo loan

loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or
securitization by the federal agencies.

Loan amortization schedule

The schedule for repaying the interest and principal on a loan.

Loan syndication

Group of banks sharing a loan. See: syndicate.

Loan value

The amount a policyholder may borrow against a whole life insurance policy at the interest rate
specified in the policy.

Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.

Multifamily loans

loans usually represented by conventional mortgages on multi-family rental apartments.

Parallel loan

A process whereby two companies in different countries borrow each other's currency for a
specific period of time, and repay the other's currency at an agreed maturity for the purpose of reducing
foreign exchange risk. Also referred to as back-to-back loans.

Project loan certificate (PLC)

A primary program of Ginnie Mae for securitizing FHA-insured and coinsured
multifamily, hospital, and nursing home loans.

Project loan securities

Securities backed by a variety of FHA-insured loan types - primarily multi-family
apartment buildings, hospitals, and nursing homes.

Project loans

Usually FHA-insured and HUD-guaranteed mortgages on multiple-family housing complexes,
nursing homes, hospitals, and other development types.

Savings and Loan association

National- or state-chartered institution that accepts savings deposits and
invests the bulk of the funds thus received in mortgages.

Self-liquidating loan

loan to finance current assets, The sale of the current assets provides the cash to repay
the loan.

Term loan

A bank loan, typically with a floating interest rate, for a specified amount that matures in between
one and ten years and requires a specified repayment schedule.

Transaction loan

A loan extended by a bank for a specific purpose. In contrast, lines of credit and revolving
credit agreements involve loans that can be used for various purposes.

Variable rate loan

loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

Loans payable

Amounts that have been loaned to the company and that it still owes.

Negative Loan Covenants

loan covenants designed to limit a corporate borrower's behavior
in favor of the lender.

Positive Loan Covenants

loan covenants expressing minimum and maximum financial measures
that must be met by a borrower.

Bridge Loan

A short term loan to cover the immediate cash requirements until permanent financing is received.

Demand Loan

A loan which must be repaid in full on demand.

Farm Improvement and Marketing Cooperatives Loans Act

See here

Fixed Rate Loan

loan for a fixed period of time with a fixed interest rate for the life of the loan.

Loan Capital

Borrowed funds having a fixed interest rate.

Operating Loan

A loan advanced under an operating line of credit.

Term Loan

A secured loan made to business concerns for a specific period (normally three to ten years). It is repaid with interest, usually with periodical payments.

personal loan

A lump sum that you borrow from a financial institution for a specified period of time. To repay the loan, you pay interest on the entire lump sum, and make payments on a scheduled basis.

secured loan or line of credit

A lump sum of funds (loan), or a revolving source of credit with a pre-established limit (line of credit), for which the customer must provide collateral.

Commercial Business Loan (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for business purposes.

Agency bank

A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.

Agency pass-throughs

Mortgage pass-through securities whose principal and interest payments are
guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").

Amortization

The repayment of a loan by installments.

ARM

Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate
at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate
equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to perinterval
and to life-of-loan interest rate and/or payment rate caps.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Back office

Brokerage house clerical operations that support, but do not include, the trading of stocks and
other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory
compliance.
Back-end loan fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from
4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a
designated time, such as one year. The commission decreases the longer the investor holds the shares. The
formal name for the back-end load is the contingent deferred sales charge, or CDSC.

Back-to-back financing

An intercompany loan channeled through a bank.

Balloon maturity

Any large principal payment due at maturity for a bond or loan with or without a a sinking
fund requirement.

Blanket inventory lien

A secured loan that gives the lender a lien against all the borrower's inventories.

Bond

Bonds are debt and are issued for a period of more than one year. The U.S. government, local
governments, water districts, companies and many other types of institutions sell bonds. When an investor
buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the
loan at a specified time. Interest-bearing bonds pay interest periodically.

Borrow

To obtain or receive money on loan with the promise or understanding that it will be repaid.

Borrower fallout

In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.

Buydowns

Mortgages in which monthly payments consist of principal and interest, with portions of these
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
payments.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Cash budget

A forecasted summary of a firm's expected cash inflows and cash outflows as well as its
expected cash and loan balances.

Cash and carry

Purchase of a security and simultaneous sale of a future, with the balance being financed
with a loan or repo.

Compensating balance

An excess balance that is left in a bank to provide indirect compensation for loans
extended or services provided.

Consortium banks

A merchant banking subsidiary set up by several banks that may or may not be of the
same nationality. Consortium banks are common in the Euromarket and are active in loan syndication.

Conventional mortgage

A loan based on the credit of the borrower and on the collateral for the mortgage.

Country risk General

Level of political and economic uncertainty in a country affecting the value of loans or
investments in that country.

Credit

Money loaned.

Debt relief

Reducing the principal and/or interest payments on LDC loans.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Defined contribution plan

A pension plan in which the sponsor is responsible only for making specified
contributions into the plan on behalf of qualifying participants. Related: defined benefit plan
Delayed issuance pool Refers to MBSs that at the time of issuance were collateralized by seasoned loans
originated prior to the MBS pool issue date.

Eurobank

A bank that regularly accepts foreign currency denominated deposits and makes foreign currency loans.

Eurocredits

Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and
government borrowers.

Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.

Federal agency securities

Securities issued by corporations and agencies created by the U.S. government,
such as the Federal Home loan Bank Board and Ginnie Mae.

Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.

FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.

Financial distress

Events preceding and including bankruptcy, such as violation of loan contracts.

Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.

Forward interest rate

Interest rate fixed today on a loan to be made at some future date.

Forward sale

A method for hedging price risk which involves an agreement between a lender and an investor
to sell particular kinds of loans at a specified price and future time.

GEMs (growing-equity mortgages)

Mortgages in which annual increases in monthly payments are used to
reduce outstanding principal and to shorten the term of the loan.

GMCs (guaranteed mortgage certificates)

First issued by Freddie Mac in 1975, GMCs, like PCs, represent
undivided interest in specified conventional whole loans and participations previously purchased by Freddie Mac.

Government sponsored enterprises

Privately owned, publicly chartered entities, such as the Student loan
Marketing Association, created by Congress to reduce the cost of capital for certain borrowing sectors of the
economy including farmers, homeowners, and students.

Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.

Highly leveraged transaction (HLT)

Bank loan to a highly leveraged firm.

International Bank for Reconstruction and Development - IBRD or World Bank

International Bank for Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high
economic priority.

Investor fallout

In the mortgage pipeline, risk that occurs when the originator commits loan terms to the
borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.

Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Lock-out

With PAC bond CMO classes, the period before the PAC sinking fund becomes effective. With
multifamily loans, the period of time during which prepayment is prohibited.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Manufactured housing securities (MHSs)

loans on manufactured homes - that is, factory-built or
prefabricated housing, including mobile homes.

Margin

This allows investors to buy securities by borrowing money from a broker. The margin is the
difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).

Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

Market clearing

Total demand for loans by borrowers equals total supply of loans from lenders. The market,
any market, clears at the equilibrium rate of interest or price.

Match fund

A bank is said to match fund a loan or other asset when it does so by buying (taking) a deposit of
the same maturity. The term is commonly used in the Euromarket.

Mortgage

A loan secured by the collateral of some specified real estate property which obliges the borrower
to make a predetermined series of payments.

Mortgage pipeline

The period from the taking of applications from prospective mortgage borrowers to the
marketing of the loans.

Mortgage rate

The interest rate on a mortgage loan.

Mortgage-backed securities

Securities backed by a pool of mortgage loans.

Mortgagee

The lender of a loan secured by property.

Mortgager

The borrower of a loan secured by property.

Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to
another currency on a rollover date.

Multiple-issuer pools

Under the GNMA-II program, pools formed through the aggregation of individual
issuers' loan packages.

Negative amortization

A loan repayment schedule in which the outstanding principal balance of the loan
increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount
required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.

Origination

The making of mortgage loans.

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