What is an equity clawback provision on a bond?

What is an equity clawback provision on a bond?

Equity clawbacks allow the issuer to refinance a certain amount of the outstanding bonds with proceeds from an equity offering, whether initial or follow-on offerings. A typical clawback would be for up to 35% of the outstanding bond issue for three years at a level equal to par, plus the coupon.

How does an equity claw work?

Equity claw. An equity claw redemption permits the issuer to use the proceeds of public or private equity issuances to redeem a portion of the outstanding bonds , traditionally 35% , as long as a certain percentage of the originally issued bonds remains outstanding , traditionally 65% .

How do interest rates affect high-yield bonds?

The value/price of a high-yield corporate bond is also affected by changes in the interest rate: Changes in interest rates can affect all bonds, not just high-yield bonds. If the interest rate increases, the value of the bond will decrease.

Is high-yield bond subordinated?

In some jurisdictions (most notably in the United States), high-yield bonds can be issued in subordinated form, whereby the bonds contain contractual provisions that expressly subordinate the bonds in right of payment to other specified categories of ‘senior indebtedness’ of the issuer.

What is a clawback provision?

A clawback clause is a provision within a business or employment contract that allows—under a prescribed set of circumstances—an organization to reclaim incentive or bonus funds previously paid to an employee.

Why are interest rates and bonds inversely related?

Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

Are high-yield bonds sensitive to interest rates?

Unlike many other types of bonds, high-yield bonds aren’t particularly sensitive to rising interest rates. That’s because rates usually rise as the economy expands, which leads to higher corporate profits and increased consumer spending. That’s good news for high-yield issuers and usually leads to lower default rates.

Is bond a debt or equity?

A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.

What does clawback mean in finance?

Clawback is a provision under which money that’s already been paid out must be returned to the employer or the firm. This is a special contractual clause, used mostly in financial firms, for money paid for services to be returned under special circumstances or events as stated in the contract.

How do interest rates work with bonds?

When it comes to how interest rates affect bond prices, there are three cardinal rules: When interest rates rise—bond prices generally fall. When interest rates fall—bond prices generally rise. Every bond carries interest rate risk.

How bond prices and interest rates are related?

Bond prices are inversely related to the interest rates on lending. When the interest rates rise, bond prices fall. When the rates fall, bond prices move upwards again.

How do bonds react to interest rates?

Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa. At first glance, the negative correlation between interest rates and bond prices seems somewhat illogical.

What happens when a high yield bond defaults?

Defaults most often occur when the bond issuer has run out of cash to pay its bondholders. Since a default severely restricts the issuer’s ability to acquire financing in the future, it is usually a last resort. It is a sign of severe financial distress.

Is indenture an unsecured bond?

A bond indenture is the contract between the bond issuer and the bondholder. A bond debenture is simply and unsecured bond.