Background
A basic principle of corporate finance is that in maximizing
shareholder value, a firm with outstanding equity and debt has an
incentive to ‘crank up’ their risk profile.  To actually answer this
question this probably needs to be obvious to you.  But for the
benefit of any interested readers not familiar with corporate finance,
imagine a firm with $2m of cash at the bank, and $1m of outstanding
face value of debt due for repayment tomorrow.  Its equity then is
worth $1m.  By betting its entire asset base on a “double or nothing”
coin toss, it increases shareholder value.  If it wins, it
shareholders equity will receive $4m-$1m=$3m.  If it loses they
receive nothing.  On average they will receive $1.5m, while
debtholders suffer all the risk of default for no gain.  On average
they only receive $0.5m because they suffer when the bet is lost, but
get no gain when it is won.

Because of this problem, bondholders tend to only be willing to lend
(at reasonable interest rates) if shareholders put in place a “bond
covenant”, otherwise known as a contract containing “indenture
provisions” that prevent shareholders from taking some actions which
might significantly increase risk.  They might for example require
bondholder permission prior to a “substantial change in the nature of
business” or an acquisition or increase in borrowings.  The problem is
these things are necessarily quite vague and can’t capture every
possible way the firm might intentionally increases its risk and
thereby enrich shareholders at bondholders expense by increasing the
risk of default on its debt.

My question
In recent times I believe a new type of solution to this problem has
emerged.  Firms have a bond covenant that specifies that the interest
rate (coupon) they must pay is tied to their credit rating.  If they
are downgraded (by S&P/Moodys/Fitch) then they must pay a higher
coupon.  This helps prevent firms from facing an incentive to take big
risks at bondholders expense.

However I only heard it through talking to some people through the
firm I used to work for once in London a couple of years ago and read
an article about it once in a Finance magazine.

I want
·	where can I find example(s) of bond covenants (especially examples
of the types of clauses that protects bondholders from shareholders
unduly increasing risk)
·	where can I find an example of a bond covenants which specify that
the interest rate or coupon increases if the firms credit rating drops
·	what are same big name firms that have such debt on issue, for which
the coupon is set initially but may increase if their credit rating
falls or is otherwise linked to their credit rating
·	anything else on the topic stumbled across that seems interesting

Thanks.

Ponderer --

The bondholder vs. shareholder conflict that you describe has been the
topic of much research.  The junk-bond era of the 1980s emphasized it
and finally with the RJR/Nabisco default a new form of bond appeared
to deal with takeovers.  In this case it wasn't a change in coupon
rate but rather a mandatory redemption of the bond in the event of a
takeover that was used.  There's lot of information on these types of
bonds, if you're interested.  Here's a Google search strategy if you
want to browse the area yourself:
bonds + "event risk"

Best regards,

Omnivorous-GA