Question

A facility built with a revenue bond issue has been condemned. which of the protective covenants found in the trust indenture would be activated?

Answer 1

Catastrophe call covenants are the protective covenants found in the trust indenture that would be activated.

Explain the Catastrophe call.

• If a facility is condemned, it can no longer generate revenues.
• Though the question is not clear as to why it was condemned, the best choice is that a catastrophe call provision would be activated.
• This requires the issuer to call in the bonds, repaying the bondholders if a disaster occurs.
• Of the other choices, sinking fund covenants and defeasance covenants have no bearing. A maintenance covenant requires the issuer to maintain the facility in good repair.
• This covenant is not "activated" by condemnation, as is a catastrophe called a covenant.

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