Editing Openai/68df4a3a-428c-8013-a459-5cff8e17edde (section)

==== They mainly protect bondholders by reducing the risk that the company will take actions that make it harder to repay its debt. ====

Specifically, they protect against:
# Excessive Risk-Taking - Companies might be tempted to borrow more or take risky projects since bondholders bear much of the downside risk. - Covenants prevent reckless behavior that could endanger repayment.
# Asset Stripping - Without restrictions, a company could sell off valuable assets (collateral), making bonds less secure.
# Dilution of Bondholder Claims - Covenants can restrict issuing new debt that would rank equal or higher in priority, protecting existing bondholders’ position.
# Cash Flow Drain - Limits on dividend payments or share buybacks ensure the company doesn’t give too much cash to shareholders instead of servicing debt.
# Financial Health - Financial covenants (like maintaining a certain debt-to-equity ratio or interest coverage ratio) protect bondholders by ensuring the company stays financially stable.