Identifier: C2T3L2 | Revision: 2026-10-26

Decision and objectives

Two bonds share an issuer but promise different creditor rights. Read the security's documents before assuming equal risk. A prospectus explains the issuer and offering; final terms or the issue document identify the particular series. Covenants are contractual restrictions or undertakings. Their exact definitions and remedies matter more than a reassuring heading.

Objectives: Extract creditor rights from terms; Calculate covenant headroom; Distinguish issue rating from a guarantee.

Prerequisites: C2T3L1.

Mechanics

An unsecured senior creditor has a debt claim without specifically pledged collateral. A secured creditor has stated security rights subject to validity, priority and enforcement. Subordinated claims rank behind specified other creditors. A holding-company issue may depend on dividends from operating subsidiaries whose own creditors are paid first. This structural subordination can matter even when the note itself is called senior.

Record issuer, guarantor if any, guaranty limits, governing law, secured assets, payment rank, covenant tests, reporting schedule, events of default, grace periods and amendment votes. A rating is an agency opinion under a stated scale and date; it is not a repayment guarantee or a substitute for issue terms. An issuer rating and a subordinated issue rating may differ.

Price and return drivers

Credit price depends on payment capacity, leverage, liquidity, security and expected recovery, as well as rates and market liquidity. Covenant headroom measures distance to a defined contractual limit. For maximum net debt / earnings before interest, taxes, depreciation and amortization (EBITDA), headroom = limit minus actual ratio. EBITDA is an accounting-derived measure, not cash available for immediate debt service; the contract can define adjustments differently from financial statements.

Worked case

Hypothetical manufacturer: gross debt TRY 600 million, eligible cash TRY 100 million, covenant EBITDA TRY 200 million; maximum net debt/EBITDA 3.0 times. Net debt = 600 − 100 = TRY 500 million. Ratio = 500 / 200 = 2.50 times. Headroom = 3.0 − 2.5 = 0.50 times. At unchanged EBITDA, additional net debt capacity is 3 × 200 − 500 = TRY 100 million, assuming the contract contains no other binding tests.

An annotated document record would state: covenant tested semiannually; only unrestricted eligible cash deducted; acquisition adjustments require supporting evidence; breach remedy depends on the written cure and default clauses. These are fictional terms, not statements about every domestic bond. A ratio calculation without these definitions is not a covenant analysis.

Adverse case

If EBITDA falls to TRY 150 million while net debt remains TRY 500 million, leverage becomes 3.3333 times, exceeding the limit by 0.3333 times. That does not automatically mean immediate liquidation: check test date, cure rights, waiver process and acceleration provisions. However, assuming a waiver without evidence conceals credit risk. A secured label also cannot establish that pledged assets cover all outstanding senior debt after enforcement costs.

Practical use

Retrieve the issue prospectus, final terms, current financial statements, material disclosures and dated rating report. Compare the legal obligor with the group whose results are advertised. Check retail versus restricted distribution without quoting unverified eligibility thresholds. Use the intermediary's actual trade and custody terms for cash access. Coupon and sale taxation remain investor- and date-specific; they do not change the creditor ranking.

Decision boundaries

A slightly higher yield may be inadequate compensation for weak cash flow, loose definitions or deeply subordinated payment rights. Decline the trade when the investor's limit requires senior unsecured debt but the offered issue is subordinated, even if the issuer is familiar. Do not infer that regulatory document approval evaluates the investment's merits or ensures payment. Record missing documents as unresolved facts rather than favorable assumptions.

Practice and references

Exercise: fictional net debt TRY 360 million; covenant EBITDA TRY 120 million; maximum leverage 3.5 times. Answer: ratio 3.0 times; headroom 0.5 times; extra debt capacity at unchanged EBITDA = 3.5 × 120 − 360 = TRY 60 million. If EBITDA declines to TRY 90 million, ratio rises to 4.0 times and the limit is breached by 0.5 times before any cure.

Takeaway: calculate the contractual ratio, then read what a breach actually permits.

Reference guide: domestic-corporate-bond, covenant-headroom, Covenant, Seniority, Credit rating.

Next: C2T3L3. Topic test: C2T3.

Primary sources (checked 2026-10-26; changing terms require a publication recheck): Borsa Istanbul Debt Securities Market products — Public Debt Instruments; Private Sector Debt Instruments; Lease Certificates; Eurobonds; SEC Investor Bulletin: What Are Corporate Bonds? — Interest rate risk, credit risk, call risk and seniority.

Shared reference guide