Credit investors up in arms over lax covenants

Will bondholders unite to demand greater protection?

Covenants have long been a bone of contention between issuers and investors. While they offer protection for bondholders – setting limits on the additional debt an issuer can incur during the life of a bond, for example – they can also restrict companies’ room for manoeuvre, anathema to executives looking to maximise profits. In this long-running power struggle, issuers have been winning the battle of late.

Last year saw a resurgence in covenant-lite debt (Credit November 2009, pp. 20–22), as