A covenant is a promise to take an action (an affirmative covenant) or to refrain from taking an action (a negative covenant). Indentures contain a variety of covenants from the issuer to the trustee on behalf of the bondholders. The covenants govern certain behavior of the issuer from the date the bonds are issued until the maturity date.

High-yield bonds provide non-investment-grade issuers with access to capital that these issuers would not otherwise be able to obtain based on their lower credit ratings. In return for the riskier investment, the bondholders providing the capital require a higher interest rate and a more restrictive covenant package.

The parties negotiating these covenants should first review the terms of the issuer's outstanding debt securities to help harmonize the terms of the offered securities with the terms of any existing debt securities. The negotiating parties also should keep in mind that weaker covenants may make the bonds harder to market and sell if potential investors feel the covenants are too loose for this type of issuer or for current market conditions. On the other hand, unnecessarily restrictive covenants may harm the issuer's ability to operate and grow according to its business strategy, which may in turn adversely impact the issuer's ability to pay interest and repay the principal amount on the bonds.

This Toolkit is a compilation of resources to help counsel understand, draft, and negotiate high-yield debt covenants.