The Value of Corporate Bond Restrictive Covenants during the COVID-19 Crisis

22 Pages Posted: 12 Jun 2020

See all articles by Stefano Lugo

Stefano Lugo

Utrecht University - School of Economics

Date Written: June 11, 2020


The secular decline in the use of secured debt by nonfinancial corporations and the relatively low level of corporate leverage observed in the 2010s have led to a decrease in the popularity and market value of bond covenants restricting negative pledge and sale-leaseback activities. Using a sample of 779 bonds issued by US nonfinancial companies and observable both before and during the COVID-19 pandemic, this study shows that the impact of these covenants on yields increases significantly once a crisis unfolds. In contrast, covenants restricting risky investments are not valued by the market in a period when companies do not have incentives to invest. Analyses accounting for the endogeneity of covenants' inclusion and focusing on the moderating role of tangible assets produce fully consistent results. Bondholders may underestimate the propensity of firms to issue secured debt during economic downturns.

Keywords: Covenants, Corporate bonds, Priming, Debt contracting, COVID-19

JEL Classification: G12, G32, G34

Suggested Citation

Lugo, Stefano, The Value of Corporate Bond Restrictive Covenants during the COVID-19 Crisis (June 11, 2020). Available at SSRN: or

Stefano Lugo (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics