(5) Covenants
o Important covenants for high yield debt include:
Change of control put
gives debt holders the right to require the issuer to buy back debt in the event of an
acquisition.
for investment grade bonds Change of control put applies only if an acquisition
of the borrower results in a rating downgrade to below investment grade.
Restricted payments protects lenders by limiting the amount of cash that may be
paid to equity holders.
Limitations on liens limits the amount of secured debt that a borrower can carry
Restricted versus unrestricted subsidiaries.
Restricted subsidiaries' cash flows and assets can be used to service the debt of the
parent holding company.
This benefits creditors of holding companies because their debt is pari passu with
the debt of restricted subsidiaries,
Restricted subsidiaries are typically the holding company's larger subsidiaries that
have significant assets.
o Bank covenants are often more restrictive than bond covenants
when covenants are violated, banks can block additional loans until the violation is
corrected.
If a violation is not remedied, banks can trigger a default by accelerating the full
repayment of a loan
b) Sovereign debt
Sovereign credit analysis must assess
o the government's ability to service debt
o its willingness to do so.
A basic framework for evaluating and assigning a credit rating to sovereign debt includes
(1) Institutional effectiveness
successful policymaking,
absence of corruption,
commitment to honor debts.
(2) Economic prospects
growth trends,
demographics,
income per capita,
size of government relative to the private economy.
Mai Nguyen
Dawn of Finance
71
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