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Because lenders do not have voting rights like shareholders do, they often reduce their risk by invoking various bond covenants that restrict the company's operating, financing, and investing activities. For example, debt covenants often restrict the amount of debt that the company can issue (in relation to its equity) and impose operating restrictions (such as the ability to acquire other companies or to pay dividends). Failure to abide by these restrictions can have serious consequences, including forcing the company into bankruptcy and potential liquidation. Assume that you are on the board of directors that issues bonds with such restrictions. What safeguards can you identify to ensure compliance with those restrictions?
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