How do high-yield bond covenants differ from investment-grade bond covenants in detail?

HY bonds usually have incurrence covenants, not maintenance covenants. They restrict specific actions unless tests are met. IG bonds usually have lighter covenant packages because investors rely more on ratings and issuer quality.

• Limitation on indebtedness: new debt allowed only if leverage or interest coverage tests are met.
• Restricted payments basket: limits dividends, buybacks, and sponsor distributions.
• Asset sale covenant: proceeds must be reinvested or used to repay debt.
• Limitation on liens: restricts secured debt that primes bondholders.
• Change of control put: investors can put bonds back, often at 101%.
• Restricted / unrestricted subsidiary definitions: critical for asset transfers and leakage.

HY covenant analysis is about protecting creditor recovery and preventing value leakage. Small drafting details can materially change bondholder protection.

'HY covenants are action tests; IG covenants are usually lighter relationship / rating-market discipline.'