Solutions to agency problem, Finance Basics

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Solutions to agency problem

The bondholders might receive the following procedures to protect themselves from the process of the shareholders that might dilute the value of the bond. These processes involve as:

1. Call capability Provisions

These provisions will give such the borrower will have to pay the debt before the ending of the maturity duration if there is breach of conditions and terms of the bond covenant.

2. Transfer of Asset

  • The bondholder or lender may insist the transfer of asset to him on providing debt or loan to the company. Conversely the borrowing company will keep the possession of the asset and the right of consumption.
  • On completion of the repayment of the loan, the asset required as collateral will be transferred back to the borrower.

 

3. Representation

The bondholder or lender may insist to have a representative in the board of directors of the borrower who such will oversee the consumption of the debt capital borrowed and safeguard the interests of the bondholder or lender.

4. Refuse to lend

Whereas the borrowing company has been included in un-ethical practices associated along with the debt capital borrowed, such the lender may withhold the debt capital thus the borrowing firm may not get together its investments requires without adequate capital.

The different way to this is to charge high interest as a deterrent mechanism on the borrower.

5. Convertibility

On breach of bond agreements, the lender might have the right to change the bonds into ordinary shares.


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