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Restricted subsidiaries are the subsidiaries of a bond issuer that sit inside the covenant group: they must obey the bond’s covenants, and their assets, debt and cash flows count as part of the credit that stands behind the bonds.

What it means

A bond indenture — especially for a high-yield bond — does not just bind the parent company that issues the debt. It draws a fence around a credit group: the issuer plus its restricted subsidiaries. Everything inside the fence is governed by the covenants that limit new debt, liens, asset sales, dividends and affiliate deals.

By default, most indentures treat every subsidiary as restricted unless the company formally designates it otherwise. Restricted subsidiaries’ earnings count toward covenant ratios, their borrowing counts against debt limits, and key ones often guarantee the bonds directly.

Why it matters for bond investors

Your bonds are only as strong as the assets and cash flows legally committed to them. The bigger and healthier the restricted group, the more substance backs your claim; if valuable businesses sit outside it — as unrestricted subsidiaries — they can raise debt, sell assets or pay dividends without regard to your covenants. When comparing corporate bonds, check what share of the group’s earnings and assets actually sits inside the restricted group, and which subsidiaries guarantee the bonds.

Related terms

• Unrestricted subsidiaries
• Limitation on transactions with affiliates
• High-yield bonds
• Guarantor
• Senior secured bond
• Corporate bond

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