Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In these two chapters, Mr. Graham and Mr. Dodd analyze the covenants and features that protect straight bonds and preferred stocks during default and during the normal course of business activities.While the prevalent rules require bondholder dues to become current in the event of default, the authors question whether this could be detrimental to bondholders themselves. That is because it is possible for the issuer to be in better shape, financially, if such payments could be extended.
During the receivership, it is best to provide creditors voting control over the company during times of default, at least when the debt structure is simple.
In addition to bondholder protections during the default, the authors also discuss provisions (prior lien, restrictions on issuance of additional debt) during the normal course of business. However, new creditors will anyway require proof of good record for any additional bond issuance.
Moreover, maintenance of sinking fund and a certain level of working capital ratios are beneficial. The former could be more useful for companies with depleting assets because without those there will be nothing left for the creditors when the resources are fully utilized.
Protective bond covenants don't assure the bond payments but only increase safety. As mentioned in chapter 10, the most important factor for bond success is the strength and prospects of the company and not necessarily its terms.
Hello Everyone! Thank you for reading my blog. If you like my content, Please Do Share, Subscribe, Like, and Comment.
If you would like to connect with me, please email abhay@skymemos.com
