Limitation on Asset Sales Covenant
(High-Yield Indenture)

Summary

This clause is a “Limitation on Asset Sales” covenant intended for use in a high-yield indenture. This clause contains practical guidance and drafting notes. The covenant is standard for a high-yield debt offering, and required by noteholders to limit the issuer’s ability to dissipate its assets or use asset sale proceeds in ways that undermine the position of the noteholders. The covenant discourages the dissipation of assets and limits the acceptable use of proceeds from asset sales to investing in other assets or reducing the issuer’s debt. Typically, within a year of any significant divestiture, the issuer must apply the net proceeds to (i) repay debt that is pari passu with or senior to the issuer’s debt, (ii) acquire all of the assets or voting stock of a company or (iii) make capital expenditures. The issuer is also required to receive fair market value for the assets and at least 75% of the purchase price in cash consideration. For more information on drafting an indenture, see Indenture Drafting for a Rule 144A / Regulation S Issuance.