Write short notes on any four restrictive covenants that debt holders may use to protect their wealth from management and shareholder raids.

CPA-Financial-Management-Section-3 Revision kit

Restructure bond covenants include the following:

(i) Restriction on investments, flats profits movement in such risky ventures. The aim to discourage assets substitution.

(ii) Restriction to disposition of assets require that the firm should not dispose of substantial part of its properties and assets.

(iii) Securing debts give bondholders title to pledge bonds until assets are paid.

(iv) Restrictions on mergers. Mergers may affect the value of claims.

(v) Covenants restricting payments of dividends a limit in distribution is placed.

(vi) Covenants restricting subsequent financing restrict issue of additional debt

(vii) Covenants modifying pattern of payment to bondholder
• Sinking fund
• Convertibility provisions
• Collability provisions
(viii) Bonding requirement
• Purchase of insurance
• Certificates of compliance
• Specification of accounting technique.

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