What is the debate regarding covenants in corporate bonds in the Eurobond market?
What will be an ideal response?
In the Eurobond market, there is a debate regarding the relatively weak protection afforded by covenants. The chief reason for this is that investors in corporate Eurobonds are geographically diverse. As a result, it makes it difficult for potential bond investors to agree on what form of covenants offer true protection.
For investment-grade corporate issues in the Eurobond market, documentation is somewhat standardized. Key terms and conditions in Eurobond documentation are: governing law, security, negative pledges, subordination, cross-default clauses, and prohibition on the sale of material assets. These items are described below.
Governing law: UK law governs most transactions, although New York state law is an occasional alternative.
Security: As a rule, issues are not secured by the company's assets.
Negative pledges: Negative pledges are common. They prohibit an issuer from creating security interests on its assets, unless all bondholders receive the same level of security.
Subordination: Except for bank or insurance capital issues, most bonds are sold on a senior basis.
Cross-default clauses: Cross-default clauses state that if an issuer defaults on other borrowings, then the bonds will become due and payable.
Prohibition on the sale of material assets: In order to protect bondholders, most documentation prohibits the sale or transfer of material assets or subsidiaries.
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