medium · Corporate Credit Analysis covenants
Under a standard 'Equal and Ratable' provision, if a company pledges its main factory to secure a new bank loan, what happens to the existing bondholders?
- The bonds automatically convert into common equity shares to avert an outright payment default.
- The bondholders are immediately paid off in full at par value, plus a one percent redemption premium.
- The bondholders must be granted a lien on that same factory that ranks at the same level as the bank's lien.
- The bondholders' existing unsecured claims are cancelled since the factory is no longer unencumbered corporate property.
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