change in control provision

Case Study Bondholders are generally at the mercy of corporate management, which tends to place maximum emphasis on pleasing stockholders. For example, a company might issue substantial amounts of additional debt in an effort to improve stockholder returns, even though the added liabilities increase the risk for all of the firm's existing creditors, including its bondholders. Stockholders are also at greater risk, but at least they expect to benefit from a higher return on their investment. Existing bondholders shoulder greater risk without any accompanying benefits. Following a number of high-profile buyouts involving substantial amounts of debt and credit downgrades, uniform maker Cintas Corporation issued $250 million of investment-grade debt that included a change in control covenant. The covenant offered protection to buyers of the bonds by allowing them to redeem the debt early in the event the company was taken over. In early 2007, Alcoa issued $2 billion of new bonds with a change in control provision. Alcoa's debt was to be used to reduce outstanding commercial paper and fund a buyback of short-term notes. The Alcoa debt was oversubscribed, in large part because the issue included the provision to protect bondholders in the event of a takeover that would almost certainly be financed with additional debt.