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Hello sir
I have come across questions asking to “discuss the impact of proposed financial reconstruction and proposals on the use of funds on equity and new debt holders”. This is a reference to the conejo question.
What are the factors that they would consider? I wasnt able to understand very well from the answer provided.
In general, equity shareholders will be concerned about the effect on the earnings per share, the effect on the level of gearing, the effect on future dividends, and whether there are any conditions (covenants) attaching to any new borrowings.
Again in general, debt lenders will be concerned about the effect on the level of gearing, the ability of the company to pay the interest on any new borrowings, and the likely ability of the company to make repayments of borrowings when they fall due.
In Conejo not all of the above will necessarily cause the equity or debt lenders to be worried, but they should all be mentioned. If you have any specific questions as to the comments made in the answer to Conejo then do say.
Within the impact on equity holders, im not able to understand the last two stanzas mentioned and the last stanza within impact on debt holders.
Why is it that shareholders are concerned about covenants and the payment of interest to debt holders?
A common covenant restricts the level of gearing in the future. That might be that they cannot raise more debt finance in the future.
Equity is concerned about interest payments because they have to be paid before the company can pay out any dividends.Debt lenders do not want the company to take unnecessary risks because that would make the ability of the company to pay interest and/or to later repay the debt more risky.
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