The Payments for Consent covenant provides important protections to bondholders, but it’s disappearing from covenant protections. In this ELFA Covenant Tip, we explain the value of this provision, the risks presented when it’s missing, and how to find it.
The Payments for Consent covenant precludes the issuer to paying any consideration to a holder in a consent or exchange unless the same compensation is offered to all holders
It is an important protection against divide and conquer strategies that can disadvantage bondholders by allowing companies to make sweetheart deals with larger holders to the detriment of the rest.
The covenant protection was once standard, but it has become a rare protection in Europe and appears in far fewer deals in the U.S. high yield market than once was the case. In fact, some recent deals contain disclaimers highlighting the covenant’s absence.
To find out if this protection is present in your deal, ctrl-F the OM for “Payments for Consent” or “consent fee” – if you don’t find any reference to the covenant at all, you can probably assume it’s not there, but check your indenture to be sure.