Covenants restricting the use of leasing and additional borrowings primarily protect:
A) the equityholders from added risk of default.
B) the debtholders from the added risk of dilution of their claims.
C) the debtholders from the transfer of assets.
D) the management from having to pay agency costs.
E) None of these.

Question

Quizplus · Accepted Answer

Covenants restricting leasing and additional borrowing primarily protect the debtholders from the added risk of dilution of their claims. By limiting the amount of additional debt and the use of leasing, debtholders can be assured that the company's assets are not being transferred or diluted, which could jeopardize their ability to be repaid in the event of default. This protection is important for debtholders who have a fixed claim on the company's assets and may not have the same recourse as equityholders in the event of default.

Covenants Restricting the Use of Leasing and Additional Borrowings Primarily