FINA 475 Chapter Notes - Chapter 22: Secured Creditor, Ratio Test, Credit Risk

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Document Summary

Protections afforded to bondholders that are provided by covenants limiting management"s discretion. Collateral available for the bondholder should issuer fail to make payments. Ability of an issuer to make contractual payments to bondholders. Analysis of the indenture is part of a credit review of a bond issue. Affirmative covenants call upon the corporation to make promises to do certain things. Negative covenants, also called restrictive covenants, require that the borrower not take certain actions. a. Bondholders may want to limits on the absolute dollar amount of debt that may be outstanding or may require some type of fixed charge coverage ratio test. Two most common tests are maintenance test and debt incurrence test. Maintenance test: (cid:396)e(cid:395)ui(cid:396)es the (cid:271)o(cid:396)(cid:396)o(cid:449)e(cid:396)"s (cid:396)atio of ea(cid:396)(cid:374)i(cid:374)gs a(cid:448)aila(cid:271)le fo(cid:396) i(cid:374)te(cid:396)est or fixed charges to be at least a certain minimum figure on each required reporting date. Corporate debt obligation can be secured or unsecured. Proceeds from bankruptcy are distributed to creditors based on absolute priority rule.

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