Covenants restricting the use of leasing and additional borrowings primarily protect:
A) the equity holders from added risk of default.
B) the debtholders from the added risk of dilution of their claims.
C) the debtholders from the transfer of assets.
D) the management from having to pay agency costs.

Question

Quizplus · Accepted Answer

Covenants that restrict leasing and additional borrowings are designed to protect debtholders by preventing the dilution of their claims. These restrictions limit the company's ability to take on additional debt that could prioritize new creditors over existing ones, thereby safeguarding the interests of current debtholders.

Covenants Restricting the Use of Leasing and Additional Borrowings Primarily