easy · Corporate Credit Analysis

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?

1. The bonds are automatically converted into common equity to prevent a default.
2. The bondholders are immediately paid off at par plus a 1% premium.
3. The bondholders must be granted a lien on that same factory that ranks at the same level as the bank's lien.
4. The bondholders' claims are cancelled because the factory is no longer unencumbered.

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