Lecture 3 Bond Docs

Question 1

Negative covenants

Answer 1

Will not enter into transaction with affiliates, etc (things you will not do)

Question 2

Merger consolidation clause

Answer 2

• protect lender from borrower merging with company with an inferior credit profile or from a jurisdiction with poor legal protections for the lender.

Question 3

Events of default clause

Answer 3

Will be covered in the doc and will cover payment of interest and principal, financial covenants and other events

Question 4

Financial covenants

Answer 4

• interest coverage ratio
• gearing
• loan to value ratio
• leverage
  banks were more lenient pre GFC

Question 5

Sale of Assets covenants

Answer 5

• cannot use sale of proceeds to pay dividend. Shifting assets from debt to equity holder

Question 6

Affirmative Covenants

Answer 6

• banks will not give covenants
• negative pledge (ie lender will not offer securities without offering to original holders. Can partly carve out (eg up to 15% can be offered etc)