Page 47 - FINAL CFA SLIDES DECEMBER 2018 DAY 15

Session Unit 16:

55. Fundamentals of Credit Analysis

Covenants. Important covenants for high yield debt include:

• Change of control put. This covenant gives debt holders the right to require the issuer to buy back

debt (typically for par value or a value slightly above par) in the event of an acquisition. For

investment grade bonds, a change of control put typically applies only if an acquisition of the
borrower results in a rating downgrade to below investment grade.

• Restricted payments. The covenant protects lenders by limiting the amount of cash that may be

paid to equity holders. tanties

• Limitations on liens. The covenant limits the amount of secured debt that a borrower can carry.
Unsecured debt holders prefer the issuer to have less secured debt, which increases the recovery

amount available to them in the event of default.

• Restricted versus unrestricted subsidiaries. Issuers can classify subsidiaries as restricted or

unrestricted. 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, rather than structurally subordinated. Restricted
subsidiaries are typically the holding company’s larger subsidiaries that have significant assets. Tax

and regulatory issues can factor into the classification of subsidiary’s restriction status. A
subsidiary’s restriction status is found in the bond indenture.