Q. A company that provides cruise ship vacations uses term loans to finance the acquisition of new cruise ships. Which of the following is most likely a negative covenant for the loans? The company must:
- ensure the ships are insured.
- seek lender approval to pay dividends.
- maintain a minimum level of working capital.
Solution
B is correct. Negative covenants require that a borrower not take certain actions. The requirement to seek the lender’s approval before paying dividends is an example of a negative covenant. The other two are affirmative covenants.
