A loan covenant is a condition written into a loan. Break one and the lender may waive it, charge more or call the loan, even if every payment was made on time.
What the film says
In private credit, a company can pay every bill on time, and still be in default. The reason is a covenant. A condition in the loan, besides paying it back. Some require things. Some forbid things. Say the loan sets a limit: debt can't pass four times earnings. The company owes two hundred million, and earns a hundred. That's two times. Well under. Then a bad year. Earnings fall to forty. Same debt. Now it's five times. Every payment made, and the limit is broken. Nobody's late. Nothing's missed. The lender can waive it. It can charge more. Or it can call the whole loan. So why do investors care? It can bring lenders to the table before a payment is ever missed. On time isn't the same as in the clear.
A simple example with round numbers, not advice. Terms vary by fund.
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