Professional Documents
Culture Documents
Debt Financing
Corporate Debt
Private Debt
Bank Loans
Term Loan Syndicated Bank Loan Revolving Line of Credit Asset-Backed Line of Credit
Private Placements
Corporate Debt
Public Debt
The Prospectus
Indenture
A formal contract between a bond issuer and a trust company, which represents the bondholders interests
Front Cover of the Offering Memorandum for the Hertz Junk Bond Issue
Corporate Debt
Public Debt Unsecured Corporate Debt Notes Debentures Secured Corporate Debt Mortgage Bonds Asset-Backed Bonds
Corporate Debt
Public Debt
Seniority
A bondholders priority, in the event of a default, in claiming assets not already securing other debt Subordinated Debenture
A debenture issue that has a lower priority claim to the firms assets than other outstanding debt
Tranches
Different classes of securities that comprise a single bond issuance
Corporate Debt
Public Debt International Bonds Domestic Bonds Issued by a local entity and traded in a local market, but purchased by foreigners Denominated in the local currency Foreign Bonds Issued by a foreign company in a local market and are intended for local investors Denominated in the local currency Yankee bonds -- Foreign bonds issued in the United States Eurobonds International bonds that are not denominated in the local currency of the country in which they are issued
Corporate Debt
Public Debt
International Bonds
Global Bonds
Combines the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously Can be offered for sale in the same currency as the country of issuance
Bond Covenants
Covenants Restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds Advantages of Covenants With more covenants, a firm can reduce its costs of borrowing. The reduction in the firms borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants
Repayment Provisions
Call Provisions
Call Date Call Price Call Premium Call Provisions and Bond Prices
Investors will pay less for a callable bond than for an otherwise identical noncallable bond A firm raising capital by issuing callable bonds instead of noncallable bonds will either have to pay a higher coupon rate or accept lower proceeds
Repayment Provisions
Call Provisions
Yield to Call
The yield of a callable bond calculated under the assumption that the bond will be called on the earliest call date
Yield to Worst
Quoted by bond traders as the lower of the yield to call or yield to maturity
For the YTC, setting the present value of these payments equal to the current price gives:
108 103 Solving for the yield to call gives: (1 YTC) 108 YTC = 1 4.85% 103
1 4.85
-103
100
The YTM is higher than the YTC because it assumes that you will continue receiving your coupon payments for 5 years, even though interest rates have dropped below 8%. While under the YTC assumptions, you are repaid the face value sooner, you are deprived of the extra 4 years of coupon payments, so your total return is lower.
Repayment Provisions
Sinking Fund
A company makes regular payments into a fund administered by a trustee over the life of the bond. These payments are then used to repurchase bonds, usually at par.
Balloon Payment
A large payment that must be made on the maturity date of a bond when the sinking fund payments are not sufficient to retire the entire bond issue.
Repayment Provisions
Convertible Provisions
Conversion Ratio Convertible Bond Pricing
Consider a convertible bond with a $1000 face value and a conversion ratio of 20 If you converted the bond into stock on its maturity date, you would receive 20 shares
If you did not convert, you would receive $1000
Conversion Price
By converting the bond you essentially paid $1000 for 20 shares, implying a conversion price per share of $1,000/20 = $50.
Repayment Provisions
Convertible Provisions
Convertible Bond Pricing
Straight (Plain-Vanilla) Bond
A non-callable, non-convertible bond
Repayment Provisions
Leveraged Buyout (LBO)
When a group of private investors purchases all the equity of a public corporation and finances the purchase primarily with debt.