Covenants in European Investment-Grade Corporate Bonds

Abstract

Covenants are a type of contractual protection for creditors in debt financing. They are used in bond contracts to control the issuer’s management activity and to attenuate conflicting goals existing between shareholders and bondholders. The article provides an overview of covenants and the way they function against the background of financial theory. It further provides detailed data on how often covenants are actually used in corporate bonds issued predominantly by European issuers. Examining the rights of fixed-income investors vis-à-vis bond issuers contributes to the increasingly significant and growing research on debt governance, which addresses, inter alia, the optimal drafting of bond contracts.

Keywords: bond financing, covenants, creditor protection, debt governance

JEL Classification: G3, K12, K22