Post #6 —Event Risk & Trigger Clauses: The Parts of the Indenture That Save You When Things Break

Series: How to Read a Bond Indenture — A Value Investor’s Framework

Introduction

Most of a bond indenture describes normal times.
Event-risk provisions exist for abnormal times.

They activate only when:

Control changes hands
Leverage spikes
Credit quality collapses
Regulations shift
The business you underwrote no longer exists

These clauses are rarely discussed in bull markets. But in stressed markets, they often determine whether a bondholder exits at par or rides the position into permanent capital loss.

If you skip this section of the indenture, you are underwriting the company only in the world you hope exists — not the one that actually occurs.

1. What Is “Event Risk”?

Event risk refers to non-operational shocks that radically alter the issuer’s risk profile without immediately triggering default.

Examples:

Leveraged buyouts
Mergers and acquisitions
Private-equity recapitalizations
Asset carve-outs
Ratings downgrades
Regulatory or tax changes

These events can:

Increase leverage overnight
Subordinate existing creditors
Strip assets from the balance sheet
Transfer risk from equity to debt

The bond indenture anticipates this — if it is well written.

2. Change-of-Control (COC): The Single Most Important Event Clause

A Change-of-Control Put allows bondholders to force the issuer to repurchase the bond usually at 101%–103% of par if control of the company changes.

Why This Exists

Acquirers often:

Use leverage to finance acquisitions
Push debt onto the target’s balance sheet
Weaken credit metrics post-deal

Without a CoC put, bondholders are dragged into a new capital structure they never agreed to.

What Qualifies as a Change of Control?

Definitions vary, but typically include:

More than 50% ownership change
Merger resulting in loss of voting control
Sale of substantially all assets
Change in board control

Key detail:
Some CoC clauses only trigger if:

A ratings downgrade occurs after the change

This is materially weaker protection.

Strong vs Weak CoC Clauses

Feature	Strong Protection	Weak Protection
Trigger	Ownership change alone	Ownership + downgrade
Repurchase Price	101–103	Par
Timing	Immediate	Delayed
Coverage	All bondholders	Limited

If a CoC clause requires a downgrade, the investor is exposed to ratings agency discretion, not contractual certainty.

3. Ratings Triggers: The Illusion of Protection

Some bonds contain clauses tied to:

Moody’s
S&P
Fitch

These may:

Increase coupon
Require collateral posting
Trigger redemption

Why These Are weak

Ratings agencies:

React slowly
Lag real deterioration
Are not legally accountable to bondholders

A bond that relies on ratings triggers rather than structural protections is outsourcing risk management to a third party.

Professional investors prefer:

Hard leverage tests
Change-of-control puts
Asset and lien protections

Ratings triggers can help — but they should never be the primary defense.

4. Tax & Regulatory Event Clauses

These allow issuers to redeem bonds if:

Tax laws change
Withholding taxes are imposed
Regulatory capital treatment shifts

Issuer Benefit

Allows clean refinancing if regulations turn hostile

Investor Risk

Early redemption at par
Forced reinvestment at inferior yields

These clauses are common in:

Bank capital instruments
Cross-border bonds
Hybrid securities

If present, investors must price them as issuer-favorable call options.

5. Asset Carve-Outs & Spin-Off Risk

Some indentures allow:

Asset sales into unrestricted subsidiaries
Spin-offs without bondholder consent
Transfer of profitable divisions

This is event risk disguised as corporate flexibility.

Red flags include:

Broad definitions of “Permitted Asset Transfers”
No mandatory debt repayment from proceeds
No bondholder put option on spin-off

This is how:

Credit quality deteriorates legally, not operationally.

6. Cross-Default vs Cross- Acceleration

These clauses determine how defaults propagate across a capital structure.

Cross-Default

A default on one debt triggers default on others immediately

Cross-Acceleration

Only triggers if the other debt is accelerated

Cross-acceleration is weaker protection.

Strong indentures include:

Low dollar thresholds
Broad inclusion of material debt

Weak indentures:

High thresholds
Exclusions for “non-recourse” or subsidiary debt

7. Leveraged Buyouts Without CoC Protection

Historically, many LBOs harmed bondholders not through default but through structural repricing of risk.

Bondholders experienced:

Higher leverage
Reduced asset coverage
No exit mechanism

When CoC protection exists, bondholders can:

Exit at a premium
Reallocate capital
Avoid being involuntary lenders to a private-equity structure

The difference is contractual, not analytical.

8. How to Read the Event Risk Section (Practical Checklist)

When you reach this part of the indenture, identify:

Change-of-control definition
Repurchase price
Downgrade requirements
Ratings trigger mechanics
Tax/regulatory redemption clauses
Asset transfer permissions
Cross-default thresholds
Subsidiary exclusions

Ask one question:

Can my risk profile change materially without my consent?

If the answer is yes, demand yield compensation — or walk away.

9. Value Investor Interpretation

Event risk clauses exist because:

Markets do not fail gradually — they fail discontinuously.

Operational metrics deteriorate slowly.
Capital structures change overnight.

The value investor’s advantage in credit comes from:

Anticipating discontinuities
Insisting on contractual exits
Refusing to underwrite management optionality for free

A bond without event-risk protection is not conservative —
it is fragile.

Conclusion

Most bond losses do not occur because companies fail slowly.
They occur because structures change quickly.

Event-risk clauses are the last line of defense between:

A controlled exit at par
And a forced ride into distress

If you don’t read this section, you are lending on hope and not structure.

Next in the Series

Post #7 — Guarantees, Subsidiaries & Structural Subordination: Who Actually Owes You the Money

We’ll break down:

Parent vs subsidiary guarantees
HoldCo vs OpCo debt
Why “senior” can still be structurally junior
How recovery pools are really formed