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 the above.

Question

Quizplus · Accepted Answer

Covenants restricting the use of leasing and additional borrowings primarily protect debtholders from the added risk of dilution of their claims. Limiting the amount of additional borrowing and leasing reduces the amount of assets that can be collateralized by new debt and hence, reduces the risk of dilution of debtholders’ claims.

Covenants Restricting the Use of Leasing and Additional Borrowings Primarily