Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 30

An Extreme Example: Unprotected Lenders?

Nabisco’s bond price plummeted on the day of the LBO, while the stock price

soared.

Is this just a paper loss? (You still get the same coupon. Only the price has

changed)

Not really. There is now a greater chance of default in Nabisco, for

which you as a lender are not compensated.

How could Nabisco’s bondholders have protected themselves?

Put in a covenant that allowed them to turn the bonds into the firm in the

event of something like an LBO and receive the face value of the bond.

(Puttable bonds)

Make the coupon payments on the bond a function of the company’s

rating (Rating sensitive bonds)