Covenants in terms of issue: what can a bondholder demand?
Leverage above the threshold? A dividend paid despite a restriction? We explain typical Catalyst covenants and the early redemption demand mechanism.
A covenant is an issuer obligation written into the terms of issue. It can require certain financial ratios, restrict additional debt, limit dividends or require collateral maintenance. For bondholders, it is a tool for controlling risk after issuance.
Common financial covenants cover net debt to EBITDA, equity, leverage ratio or interest coverage. Always check definitions in the document, because EBITDA, net debt or equity may be calculated differently from the standard financial report.
A covenant breach does not always automatically trigger immediate redemption. The terms define the procedure: disclosure timing, cure periods, bondholder meeting decisions or the right of an individual bondholder to demand early redemption.
Information covenants also matter. The issuer may have to publish reports, compliance certificates or notices about events that worsen bondholder position. Missing information can be as important as a weakening financial ratio.
Read covenants together with collateral and ranking. A strong-looking covenant without enforceability may be weaker than a simpler clause combined with transparent collateral, a collateral agent and a clear procedure after breach.
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Sources point to public materials used to verify factual claims. The content is educational and is not investment advice or a recommendation.