What is a common example of a maintenance covenant?

The correct answer highlights a common type of maintenance covenant, which is a financial metric that requires the borrowing entity to maintain certain financial ratios, ensuring that their financial health remains stable. In this case, stating that total debt to EBITDA cannot exceed 3x serves as a protective measure for lenders by maintaining a balance between debt load and earnings.

This ratio is frequently used as a way to monitor ongoing financial performance and stability. If a company were to violate this maintenance covenant, it could trigger default provisions or require corrective actions to be taken, ensuring that the company remains in a healthy operating position while managing its leverage appropriately.

The other choices illustrate different types of covenants, but they are typically classified as incurrence covenants or operational restrictions rather than maintenance covenants. For instance, placing a cap on total debt or specifying that proceeds from asset sales must be used to repay debt doesn't inherently focus on maintaining a specific financial metric over time. Similarly, limiting CAPEX spending is more about controlling how a company uses its cash flow rather than maintaining its financial ratios. These distinctions emphasize the importance of regular oversight in the context of leveraged financing, where lenders are particularly concerned with ongoing compliance to ensure that risks are effectively managed.