Event risk covenants are triggered by designated events, generally associated with a change in corporate control (e.g., mergers, acquisitions, restructuring, etc). They are intended to protect bondholders in case of a credit downgrading of the bond or its issuer.
These covenants come in two different types, poison puts and resets:
- Poison puts: if a designated event (triggering event) takes place, the poison put allows bondholders to turn in, or sell back, their bonds to the issuer at par value or at a premium.
- Reset: if a triggering event occurs, reset permits bondholders to renegotiate the coupon rate with the issuer. The interest rate would be readjusted to a level where the debt could trade at par following a credit downgrade or a change in corporate control.
