The Winnipeg Curling Company currently has one issue of debt outstanding.Winnipeg Curling has decided to borrow more money by issuing new debt with a higher priority in the event of bankruptcy.This could result in a violation of which type of covenant on the original debt?
A)Negative pledge
B)Cross-default clause
C)The new issue will not violate any covenant as there are never covenants when a firm has only one issue of debt
D)This type of transaction is illegal

Question

Quizplus · Accepted Answer

A negative pledge covenant prevents the borrower from issuing more debt that has a higher claim on the company's assets in the event of bankruptcy, which would be violated if Winnipeg Curling issues new debt with a higher priority.

The Winnipeg Curling Company Currently Has One Issue of Debt