Most Likely Negative Covenant in ABC Corporation's Bond Indenture

Explanation

In this scenario, the indenture refers to the legal agreement between the issuer of the bonds (ABC Corporation) and the bondholders. It outlines the terms and conditions of the bond issuance. A negative covenant, in the context of bond indentures, is a provision that restricts certain actions of the issuer to protect the interests of the bondholders. Let's analyze each option to determine which one represents a negative covenant:

A. Maintain its manufacturing equipment in good condition: This requirement does not represent a negative covenant. It is a general expectation or obligation that ABC Corporation should keep its manufacturing equipment in good working order. It is not directly related to the bond issuance or the bondholders' interests.

B. Make timely semiannual payments of interest and principal when due: This requirement is a standard obligation of the issuer and does not constitute a negative covenant. It specifies that ABC Corporation must make regular interest payments to the bondholders and repay the principal amount at maturity. Failing to meet these payment obligations would be a default on the bonds.

C. Have paid all bond coupon payments due before it can pay cash dividends: This requirement represents a negative covenant. It restricts ABC Corporation's ability to pay cash dividends to its shareholders until it has fulfilled its obligations to the bondholders by making all the coupon (interest) payments due on the bonds. The purpose of this provision is to ensure that the bondholders receive their interest payments before the company distributes profits to its shareholders in the form of dividends.

By implementing this negative covenant, bondholders are protected from potential situations where the company may prioritize dividend payments over meeting its obligations to bondholders. It provides a level of assurance that the bondholders' interests will be met before any cash is distributed to shareholders.

Therefore, option C, which requires ABC Corporation to have paid all bond coupon payments due before it can pay cash dividends, is the most likely provision considered a negative covenant in this case.