What are "financial covenants" in leasing agreements?

Financial covenants in leasing agreements refer to terms that require the lessee (or sometimes the lessor) to maintain specific financial metrics throughout the duration of the lease. These covenants are designed to provide assurance to the lessor that the lessee remains financially stable and capable of meeting their obligations under the lease.

Common examples of financial covenants include requirements to maintain certain levels of debt-to-equity ratios, interest coverage ratios, or liquidity ratios. By setting these financial benchmarks, lessors can monitor the financial health of the lessee and take appropriate actions if these metrics indicate potential financial distress, which could affect the lessee's ability to make timely lease payments.

In this context, the other options do not correctly define financial covenants. Market valuations of the leased asset pertain more to the assessment of asset value rather than financial conditions. Payment delay contracts relate to modifications in payment terms rather than financial performance metrics. Insurance requirements focus on protecting the asset rather than maintaining financial health, so they do not fit the definition of financial covenants either.