Structure and restrictiveness of financial covenants in bond contracts on Catalyst

Abstract

Purpose -The aim of the paper is to study the role of financial covenants in contract of bonds quoted on Polish regulated market called Catalyst. We analyze types and features of financial maintenance covenants and their restrictiveness in regard to limiting conflict of interest between shareholders and bondholders. Design/Methodology/Approach -We review the related literature and conduct research based on hand collected database of covenants. Findings -We notice that Polish public bond issuers use financial covenants relatively rare. The most common types of financial maintenance covenants are based on balance sheet and determine the greatest acceptable leverage. Issuers usually avoid using performance covenants and if they decide to use it, the threshold value is zero or negative. Neither the number of financial covenants nor financial slack are correlated with seize or leverage of issuers. Originality/Value -There is a gap in Polish research on bonds contracts' requirements and our study is the first (although introductory) attempt to explore this field which is very popular in foreign studies.

Covenant Based Credit Capacity Model for Real Estate Capital Groups: Evidence from Poland

“…Finally, the demonstrated lack of correlation between the current value of the index based on which the covenant was defined, with the sensitivity coefficient, can be interpreted as the lack of influence of the covenants imposed on the bond issuers on the exposure scale understood as the sum of the budgets of projects implemented by a given capital group on the real estate market. Simultaneously, the analysis confirms that the number of covenants and the space for additional funding is not linked to the issuer's size and its leverage, as demonstrated by Brycz et al (2015). For each of the surveyed capital groups, some form of debt ratio was used, which is in line with the survey results conducted by Demerjian (2007).…”

“…Hence the introduction of simultaneously highly correlated covenants means only an additional burden for the issuer, without affecting the control function's extension from the creditors' perspective. Brycz et al (2015) examined the types of covenants used for corporate bonds listed on Catalyst. The subject of this analysis was the degree of restriction of covenants in the context of conflicts of interest of shareholders and bondholders.…”

The importance of covenants on corporate bond market in theory and empirical research – a literature review

“…keywords: covenants, bond market, information asymmetry theory, agency theory cytowanie Brycz B., Pauka M., Śmieja N. (2015), Znaczenie kowenantów na rynku obligacji korporacyjnych w teorii i w ba daniach empirycznych -przegląd literatury, Zeszyty Naukowe Uniwersytetu Szczecińskiego nr 855, "Finanse, Rynki Finansowe, Ubezpieczenia" nr 74, t. 1, Wydawnictwo Naukowe Uniwersytetu Szczecińskiego, Szczecin, s. 23-34; www.wneiz.pl/frfu.…”