Bond Covenants – Why Investors Don’t Just Cross Their Fingers

Handing over money to a company without rules attached is a bit like lending your flatmate cash for “the food shop” and discovering they’ve bought a jet ski instead. Bondholders aren’t daft, so they insist on covenants – promises and restrictions buried in bond documents that keep issuers from rolling the dice with bondholders’ money.

Covenants don’t make investing risk free. They just keep the risk on a short lead: issuers get flexibility to run their business, and investors get comfort that the risk won’t quietly mutate into something nastier.