Corporate Credit Covenants & Documentation
Dan Pickett

Corporate Credit Covenants & Documentation

Betsi Hill video presentation

Betsi Hill, corporate bond expert and Co-Director of the Hawk Center for Investment Analysis, recently held an online tutorial on bond covenants and documentation. Understanding the importance of covenants in analyzing corporate bonds will be a significant differentiator for you relative to other undergraduates. not only if you pursue a career in corporate credit research, but also if you are interviewing for an equity research role. A solid understanding of the capital structure will make you a better analyst.

As we have discussed, the financial analysis of corporate bonds is more similar than dissimilar to the financial analysis of stocks. You can see many of the similarities (and some of the differences) in the Credit (corporate bond) Analysis readings on the Research Readings page of the website.

One substantive difference between stocks and corporate bonds is the number of issues that are available for purchase from a given company. Most companies have one class of common shares, which simplifies the assessment of the security itself. The same company could have multiple bonds issued by different entities that are part of the same corporate structure. As an example, Apple Inc. has one class of stock outstanding and 66 separate issues of corporate bonds in addition to commercial paper.

While the characteristics of every one of Apple's 4.334 billion common shares outstanding are identical, the company's corporate bonds differ by issue date, maturity date, amount outstanding, coupon rate, coupon type (variable versus fixed), issue currency, seniority in the capital structure, and covenants. You can use the Factset>Credit Analysis>DCS Detail report to find key information about the outstanding corporate bonds of a specific company. The specific terms for each issue are outlined in the bond indentures, prospectuses, and bank credit agreements. In this video, Betsi reviews the attached presentation covering investment grade covenants, bank credit agreements, and high yield covenants using specific examples. Watching this video will help you develop one more tool in your analytical toolbox.


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