Basic anatomy of the change of control covenant

The change of control provision gives bondholders the right to require an issuer to purchase some or all of the outstanding bonds at a price of 101% (customarily). At a basic level, it is a put right that provides some protection for bondholders when the issuer is acquired (or at least control is taken) by someone new. It may be the case that the bondholders disapprove of the new owner (i.e., sponsor), new management (if the old management is taken out), or it could be that it provides an opportunity for bondholders to exit their investment if the change of control happens at a time when the bonds are trading below the put right price.

Technically speaking the provision is typically triggered by:

1. a transaction that results in a person (or group) other than a Permitted Holder (a defined term discussed in more detail below) owning > 50% of the issuer’s voting stock (or in public companies, typically 20-40%); or
   
2. the sale of all or substantially all the assets of the issuer to a person other than a Permitted Holder.
   

There are of course a few key carve-outs to the above, discussed below.