What Is an Adjustment Bond?

An adjustment bond is a type of bond issue that is often issued when a business is attempting to remain operational by using some type of bankruptcy protection. As part of the strategy, restructuring all the debt of the business, including any outstanding bond issues, becomes necessary. The adjustment essentially serves as the cumulative repository for all funds owed to investors on current bond issues, making it possible for the business to engage in recapitalization of the bonds before proceeding with the overall debt restructuring that is part of the bankruptcy proceedings.

It is not unusual for an adjustment bond strategy to be used when a company is seeking protection from it creditors through the courts. This is especially true with what is known as a Chapter 11 bankruptcy, which serves as a debt reorganization. Here, the court works with the company to create a schedule for repayment that is within the ability of the company to manage. When an adjustment bond is created to cover all outstanding bond issues, this means that investors may not receive returns according to the original schedule, but they will receive timely interest payments and eventually recover all the principal invested.

The use of an adjustment bond is actually to the benefit of investors with an interest in the bonds issued by the company seeking bankruptcy protection. When the purpose of the protection is to all the company the chance to reorganize the operation so that it can meet its debts, bundling all the outstanding bonds under one central umbrella means that investors are far more likely to ultimately receive all the returns they anticipated, or at least a majority of those returns. By contrast, if the courts deemed that the company was not able to pay its debts and ordered the liquidation of assets to settle debt, the investors would likely realize much less from the bonds.

By issuing an adjustment bond, the financially troubled company is taking a step to ensure that ultimately all bondholders do receive returns on the investment. Since the schedule for repayment will be determined by the courts and will take into consideration all the repayment terms associated with the individual bonds that are rolled under the umbrella of the adjustment bond, there is a good chance that some changes in the repayment terms will be implemented. Even allowing for those changes, the odds of receiving all or most of the anticipated benefits from investing in the bond are much better than if the company were forced into liquidation and the courts only allowed payments that amount to a small percentage of the total investment in the bond issues.