Definition
The term adjustment bond refers to a security issued when a corporation is recapitalized during a bankruptcy proceeding. Adjustment bonds are issued in exchange for the outstanding debt of an organization, typically with terms that will help the corporation successfully emerge from bankruptcy.
Explanation
During the recapitalization phase of a Chapter 11 bankruptcy proceeding, a corporation can consolidate their outstanding debt and transfer those obligations to adjustment bonds. These securities provide the issuer with more favorable terms such as the security's rate of interest. Adjustment bonds are issued to increase the likelihood the corporation will be successful in meeting their debt obligations and subsequently emerge from bankruptcy.
Corporations need the cooperation, and approval, of existing bondholders when issuing an adjustment bond. As is the case with income bonds, adjustment bonds only pay interest after payment has been made to all other obligations. Failure to pay the stated rate of interest, if not earned, does not result in default on the bond.
Related Terms