Limitation on Sale of Assets: Definition

Limitation on sale of assets is a bond covenant that controls how an issuer may sell its assets, typically requiring fair value, largely cash consideration, and that the proceeds be reinvested or used to repay debt.

What it means

Bondholders lend against a business as it exists at issuance. If the company later sells the factories, brands or subsidiaries that generate its cash flow, the credit backing the bonds can quietly shrink. The asset sales covenant keeps such disposals on a leash rather than banning them.

A typical high-yield formulation requires that any significant sale be at fair market value, that a large share of the consideration (commonly around 75%) be cash or cash equivalents, and that the net proceeds be applied within a set period — usually to reinvest in the business or repay senior debt. Proceeds not so used become “excess proceeds” and, above a threshold, trigger an asset sale offer: the issuer must offer to buy back bonds, normally at 100% of face value.

Why it matters for bond investors

The covenant stops an issuer from selling the family silver and handing the money to shareholders. It also gives bondholders a valuable exit right — a par buyback offer — when the business that originally supported the bonds is partly sold off. As with other covenants, the details (baskets, reinvestment windows, carve-outs) determine how much protection you actually get, so covenant summaries are worth reading before you buy.

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

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