As discussed in class, companies and their debt investors often structure the terms of their debt contracts to include covenants that serve two primary purposes: 

1. Restrict the company from taking actions expected to be detrimental to the interests of the debt holders 
2. Trigger early repayment of the debt if the company's business or financial health deteriorate below specified levels. 

 

Prof. Triantis of the Stanford Law School is a contracts expert, and in a recent conversation he noted current work on the extension of contracts terms to more completely specify what happens under specific events of default under a contract.  For example, in the case of debt, if a covenant is broken or other event of default occurs, additional contract terms could specify the actions and outcomes that would apply, rather than simply leaving their determination to bankruptcy courts.  In short, there is nothing stopping companies and their debt investors from defining post-default events and outcomes more completely in the contracts that define the terms of their loans. 

 

1. 1) What top benefit do you believe the approach offers ? 

 

2) What top concern (potential negative) would you want to be sure to bear in mind when implementing the approach ?