Covenant Fall-Away Provision: Definition

A covenant fall-away provision is a clause in a high-yield bond indenture that permanently eliminates most restrictive covenants once the bonds receive investment-grade ratings from at least two rating agencies.

What a covenant fall-away provision means

High-yield bonds come with a thick package of covenants — limits on new debt, dividends, asset sales and deals with affiliates — because the issuer is considered risky. Investment-grade bonds carry far fewer. A fall-away provision bridges the two worlds: it says that if the issuer is later upgraded to investment grade, the high-yield covenants drop out of the contract, and the bonds are governed only by the lighter “investment-grade covenants” from then on.

The standard trigger is an investment-grade rating from two out of three agencies (or two out of two, if only two agencies rate the notes) plus no outstanding default. When that “fall-away event” occurs, the covenants that typically disappear are the limitation on indebtedness, the limitation on restricted payments, the asset-sale covenant, the affiliate-transactions covenant, the guarantee covenant and the financial-ratio test inside the merger clause. What stays: the limitation on liens, the core merger restrictions, the change of control put and the reporting covenant.

The crucial word is permanently. A fall-away provision is the more issuer-friendly cousin of a covenant suspension clause. Under suspension, the covenants only sleep: if the issuer is downgraded back to high yield, they “spring back” on a reversion date. Under a true fall-away, they are gone for good — even if the company later becomes a fallen angel. Law firms note that pure fall-away language is “generally found in the covenant packages of highly rated sponsor deals that are on the cusp of achieving investment-grade ratings.”

Why a covenant fall-away provision matters for bond investors

For the issuer, the clause is a reward for good behavior: reach investment grade and you gain the freedom of an investment-grade borrower without refinancing. For bondholders, it is a trade-off worth understanding before you buy.

You lose protection exactly when you may need it later. Ratings can fall as well as rise. With a suspension clause you get your covenants back after a downgrade; with a fall-away clause you do not.
Check the trigger. Two agencies is standard. A clause that fires on a single agency’s upgrade is weaker.
Read what survives. Liens, merger and change-of-control clauses should always remain. If they fall away too, the bond is effectively unprotected.
Price it in. Bonds from “rising star” candidates often trade with tighter spreads partly because a fall-away is expected; the flip side is that the documentation will be thinner once it happens.

Example

A BB+ issuer’s notes carry a fall-away provision. In year three, S&P Global Ratings and Fitch both lift the issuer to BBB−. The fall-away event occurs and the limitations on debt, restricted payments and asset sales are deleted from the indenture. Two years later the company is downgraded to BB after a debt-funded acquisition. Because the clause was a fall-away rather than a suspension, the deleted covenants do not return — holders keep only the liens, merger, change-of-control and reporting protections.

Sources: Mayer Brown, High Yield Bonds: Covenant Packages Tailored to Suit; Western Asset Management, Introduction to High-Yield Bond Covenants; Cbonds, Covenant Suspension/Fall-Away.

This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal. Updated 31 August 2026.

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