This website uses cookies to ensure you have the best experience. Learn more

What Are Debt Covenants And Why Are The Debt Covenant Are Heavily Used In Private Debt?

712 words - 3 pages

What are debt covenants? :Debt covenants are instruments available to lenders to limit the borrowers' action during the loan term. These agreements between companies and its creditors require companies to operate within the specific conditions of the loan agreements. They are negotiated during the debt structuring process and are different for every transaction. An example of the debt covenants is that if a company misses its interest payments (coupons), the bondholders may acquire the right put the company into liquidation. Further examples of "financial" covenants include maintenance of minimum working capital and debt service coverage ratios, maintenance of minimum net worth, restrictions ...view middle of the document...

The common agency problems occur when managers or shareholders who usually have more information about firms acts riskier to increase their earnings at expense of debt holders money. They may involve in benefit seeking activities that are detrimental for creditors. Consequently, following debt covenants, creditors may demand immediate payments if borrowers are in breach of covenants agreements (also known as technical defaults). Studies show that debt covenants violations are frequently in public debt market. Therefore, debt covenants are heavily used to prevent the negative effects of a technical default to the lenders. Second, debt covenants may include elements that prevent the asymmetric information problems. Generally, lenders are not fully informed about the financial statistics of the company to which they are borrowing. By requiring, for example some financial statements from the company through debt covenants, lenders may mitigate the asymmetric information problem. For this reason, debt covenants are also widely used in private debt market.[4: Graeme Pietersz, "Debt Covenants", accessed August 6, 2014, http://moneyterms.co.uk/debt_covenants/ ][5: Mitchell Berlin and Loretta J. Mester, "Debt Covenants and...

Find Another Essay On What Are Debt Covenants And Why Are The Debt Covenant Are Heavily Used In Private Debt?

National Debt Essay

2559 words - 10 pages yearly amount by which spending exceeds revenue. Add up all the deficits (and those few budget surpluses we've had) for the past 200+ years and you'll get the current National Debt. Some in the government are even considering a Balanced-Budget Amendment, but what would be best for the US economy? Historically, the United States has consistently had a debt, which has been constantly growing. However, the debt is best judged in comparison to the

The National Debt Essay

4829 words - 20 pages performed in a sound manner and helps tackle the basic problems that are created by increased national debt. The first issue that is to be addressed by the policy is the issue of crowding out. This issue exists whenever the government consumes private sector investments and the finances in the market actually end up raising the credit rates and borrowing interest rates for the markets. This becomes a major impediment for private investors doing

Natiomal Debt

834 words - 4 pages one side scenario which will help the United States pay its debt off to itself. The scenario is called “Lotto to Debt” in this scenario the tax money that is taken from the person who wins the lottery will be used to play off the debt we owe ourselves rather than to the uses that we do not know about. 35% tax is taken when you win the lotto that money will be taken from the citizen and will be used to pay off the $4.14 trillion of dollars we owe

Debt Collectors

990 words - 4 pages month on an 8-year old debt. You may be thinking to yourself that debtor's prisons are a thing of the past and were outlawed years ago. That basic fact is true. However, as more and more consumers fail to pay their due, creditors are looking for more and more ways to push the envelope to extract payment from delinquent customers. One way has been to use aggressive collection agencies and law firms that specialize in the collection of consumer

Student Debt

874 words - 4 pages school loans. So, she decided to go back to school and got her MBA in marketing from western International University as she currently working now as a full time job. (Liberto, 2013) Those two sisters are example for a lot more students who’re going through similar life stories. One of the sisters, Heather, after graduate from college was able to find a job in her field, and was very happy, even though, she was in deep debt. Unlike her sister

Unsustainable Debt

1881 words - 8 pages Unsustainable Debt Many ordinary citizens today in developed countries such as Canada acknowledge the abject poverty affecting citizens of various African countries and other undeveloped nations. However, exactly why these countries are in this position appears to be a mystery, despite many cash grants, relief efforts, and aid are delivered to these countries by various Western organizations amidst great media attention. In addition, it

The U.S. National Debt

1080 words - 4 pages increased an average of $1.6 billion per day since September 2003. As amazing at it is, the government spending will most likely exceed its limits in the year 2005 therefore making our nation even more vulnerable.Unfortunately, these increases have become so common that the media hardly reports them and there are no political costs for those who vote as such. When the national debt is carelessly enlarged it suggests to investors that the government

Life and Debt

522 words - 2 pages Jamaica maybe a beautiful country, but it is in a state of economic crisis. Crops and goods are imported from the United States and other countries and they are sold at a cheaper price than locally produced goods. Perhaps developed countries which have a stable economy are dumping their excess goods/ surplus in Jamaica as they can afford to do so as they already have a stable economy. This makes imports cheaper than locally grown goods without

Life & Debt

527 words - 2 pages Jamaica to over four billion dollars in debt to the World Bank and IMF. This ultimately caused a sinking economy of low valued imports and sweatshops are destroying local businesses and agriculture. In the video, we see workers who are working gruesome six-day-a-week work schedules to receive the legal minimum wage of only $30 in US money for the entire week. Many women have protested against the poor compensation, and have been fired from their jobs

The International Debt Crisis

1826 words - 8 pages Most people are aware of the harsh circumstances that are currently affecting the developing world; however, not many understand that this is a result of the international debt crisis. This crisis emerged in the 1950s and is still a current issue. Developing countries continue to live in devastating conditions, with no evidence of any improvements. The reasons as to why these countries suffer can be traced back to the developed world. While

To What Extent Should Debt Be Justified In The Economy?

1005 words - 5 pages Keynesian economics is the idea that government spending can be used to stabilize the economy, and stresses the importance of moderate economic growth. According to Keynes, during prosperity governments should reduce spending to avoid inflation and to slow down consumer spending in order to maintain stable growth. During times of prosperity Keynesian theory states that governments should pay off debt, reducing the amount of money lost to

Similar Essays

What Are The Legal Ways To Recover Debt From Relatives And Friends?

729 words - 3 pages What are the legal ways to recover debt from relatives and friend? When someone owes your money, then you will rapidly find yourself in debt recovery business though you don’t want to be. There are a lot of companies out there helping persons escape their duties. I determined, it is the time to be able to assist you, you should never skip out. Ultimately, you loaned some cash to someone and they promised to repay you back on the specific time

Why All The Debt? Essay

1911 words - 8 pages Seventeen trillion dollars in debt and growing every day. Continuous tax cuts and drastically increased spending. Turning a blinds eye to our continuous deficient financing, spending more than what we take in. Throwing countless sums of money into foreign country research projects or wastefully spending within the states, having to borrow to make up for the short comings in our budget. The government shutdown and fear of being thrown back

What Are The Advantages And Disadvantages For American Semiconductor To Forgo Their Debt Financing And Take On Equity Financing?

772 words - 3 pages , venture capitalist or any investors are considering giving money to any borrower, then the most important part of it will be the debt equity ratio, by which it can be determined, whether there is adequate money available for repayment in case there is any failure to pay and also reflects the amount of dependents of the business on outer sources.In summary, deciding the process of financing is not an easy task. A company must give thought on the

Debt Problems Why We Are Having So Many Now A Days

742 words - 3 pages A credit card can be a great convenience. Further, it is easy to acquire. However, if it is not used prudently, the card can become one's greatest financial adversary. In today's society, it is easy and common to charge one's purchases to an account or credit card. However, paying for the purchases when the monthly bill arrives can be more difficult. By simply reading the newspaper, we become aware that the availability of easy credit has given