Covenants are key contractual terms set down by various stakeholders, to ensure their interests are met over the lifetime of the project. Financial covenants impose certain financial obligations on the SPV. For example, the borrower could be required to maintain the minimum level of DSCR as stated in the covenant to mitigate credit risk to the debt holders.
Non-financial covenants can either be positive or negative. Positive covenants, also known as affirmative covenants, are obligations the borrowers adhere to in the interests of the debt holders (for example, the obligation to keep required risk insurance in force). In contrast, negative covenants, also known as restrictive covenants, are obligations for the borrowers to refrain from performing certain actions (for example, the obligation for the SPV to not undertake any other activity except for building and operating the project).
Other key covenants are step-in rights (or embedded options) which allow for unique state-dependent control rights to protect the interest of stakeholders.