Authors: Noel Yahanpath and Rachel Bellard
Abstract: The conflict of interest between bondholders and shareholders and the expropriation of funds, from one stakeholder to another, is well documented in the finance literature. There are three ways in which stockholders can expropriate funds from bondholders: through increased leverage, investing in new risky projects, and payments such as dividends to equity holders. Many protective covenants have been introduced into the bond indenture. This paper examines the covenants that were offered in fifteen recent New Zealand bond issues and their effectiveness. It also looks at strategies bondholders can use to minimise the risks to which they are exposed. To this end, eight types of protective covenants were examined. The results of the paper suggest that bondholders gain little protection from the protective covenants provided by issuers.
