Which type of covenant assesses the financial health of the borrower?

The type of covenant that assesses the financial health of the borrower is the Financial Statement Covenant. This covenant typically requires the borrower to provide periodic financial statements to the lender, allowing the lender to evaluate key financial metrics such as liquidity, profitability, and solvency. By analyzing these financial statements, lenders can monitor the ongoing financial condition of the borrower and ensure that they remain compliant with agreed-upon financial thresholds or ratios, which are often detailed in the loan agreement.

These covenants serve an essential purpose in commercial lending, as they help protect the interests of the lender by enabling them to identify potential risks early on. Regular assessments can alert lenders to any deterioration in the borrower's financial health that may pose a risk to repayment.

Other types of covenants, while important, either focus on specific financial behaviors or protective measures rather than providing a comprehensive view of a borrower's overall financial standing.