Long-Term Debt презентация

Issue of Bonds
20.3 Bond Refunding
20.4 Bond Ratings
20.5 Some Different Types of Bonds
20.6 Direct Placement Compared to Public Issues
20.7 Long-Term Syndicated Bank Loans
20.8 Summary and Conclusions

less than one year) or long-term.
Different from common stock:
Creditor’s claim on corporation is specified
Promised cash flows
Most are callable
Over half of outstanding bonds are owned by life insurance companies & pension funds
Plain vanilla bonds to “kitchen sink” bonds

of Issue, Maturity
Denomination (Par value)
Annual Coupon, Dates of Coupon Payments
Security
Sinking Funds
Call Provisions
Covenants
Features that may change over time
Rating
Yield-to-Maturity
Market price

the issuance of stock, as described in the previous chapter.
Indentures and covenants are not relevant to stock issuance.
The indenture is a written agreement between the borrower and a trust company. The indenture usually lists
Amount of Issue, Date of Issue, Maturity
Denomination (Par value)
Annual Coupon, Dates of Coupon Payments
Security
Sinking Funds
Call Provisions
Covenants

repayment each year
Good news---security
Bad news---unfavourable calls
How trustee redeems

specified amount
sell more senior debt and amount of new debt is limited
refund existing bond issue with new bonds paying lower interest rate
buy another company’s bonds
Positive covenant: Thou shalt:
use proceeds from sale of assets for other assets
allow redemption in event of merger or spinoff
maintain good condition of assets
provide audited financial information

between 5 and 10 years after initial issuance.
Some establish equal payments over the life of the bond.
Most high-quality bond issues establish payments to the sinking fund that are not sufficient to redeem the entire issue.
Sinking funds provide extra protection to bondholders.
Sinking funds provide the firm with an option.

the entire bond issue at a predetermined price overa specified period.
The difference between the call price and the face value is the call premium.
Many long-term corporate bonds outstanding in Canada have call provisions.
New corporate debt features a different call provision referred to as a Canada plus call.
The Canada plus call is designed to replace the traditional call feature by making it unattractive for the issuer ever to call the bonds.

called refunding.
Bond refunding raises two questions:
Should firms issue callable bonds?
Given that callable bonds have been issued, when should the bonds be called?

have value.
A call works to the advantage of the issuer.
If interest rates fall and bond prices go up, the option to buy back the bonds at the call price is valuable.
In bond refunding, firms will typically replace the called bonds with a new bond issue.
The new bonds will have a lower coupon rate than the called bonds.

why a company might use a call provision:
Superior interest rate predictions
Taxes
Financial flexibility for future investment opportunities
Less interest-rate risk

for call provisions include: taxes, managerial flexibility, and the fact that callable bonds have less interest rate risk.

transaction costs, it can be shown that the company should call its bonds whenever the callable bond value exceeds the call price.
This policy minimizes the value of the callable bonds.
The costs from issuing new bonds change the refunding rule to allow bonds to trade at prices above the call price.
The objective of the company is to minimize the sum of the value of the callable bonds plus new issue costs.

protection afforded by the loan contract in the event of default.
Who pays for ratings:
Firms pay to have their bonds rated.
The ratings are constructed from the financial statements supplied by the firm.
Ratings can change.
Raters can disagree.

is a junk bond.
A polite euphemism for junk is high-yield bond.
There are two types of junk bonds:
Original issue junk—possibly not rated
Fallen angels—rated
Current status of junk bond market
Private placement
Yield premiums versus default risk

Types of Bonds

of the put feature

of stock acquired by conversion
Conversion price:
Bond par value / Conversion ratio
Conversion value:
Price per share of stock x Conversion ratio
In-the-money versus out-the-money

a third company’s common stock.
Minimum (floor) value of convertible is the greater of:
Straight or “intrinsic” bond value
Conversion value
Conversion option value
Bondholders pay for the conversion option by accepting a lower coupon rate on convertible bonds versus otherwise- identical nonconvertible bonds.

offered at a price that is much lower than its stated value.
For tax purposes, the issuer of a zero-coupon bond deducts interest every year even though no interest is actually paid.
Zero-coupon bonds, often in the form of stripped coupons, are attractive to individual investors for tax-sheltered Registered Retirement Savings Plans (RRSPs).

adjustments are tied to the Treasury bill rate or another short-term interest rate.
Majority of floaters have the following features:
The holder has the right to redeem her note at par on the coupon payment date after some specified amount of time.
The coupon rate has a floor and a ceiling. i.e., a minimum and a maximum.

income.
Retractable bonds: allow the holder to force the issuer to buy the bond at the stated price. Examples are Canada Savings Bonds (CSBs).
A stripped real-return bond is a zero coupon bond with inflation protection.

of direct private long-term financing:
Term loans
Private placements
Differences between direct private long-term financing and public issues of debt are:
Registration costs are lower for direct financing.
Direct financing is likely to have more restrictive covenants.
It is easier to renegotiate a term loan or a private placement in the event of default.

made by a group (or syndicate) of banks and other institutional investors.
A syndicated loan may be publicly traded.
It may be a line of credit and be “undrawn” or it may be drawn and be used by a firm.
Syndicated loans are always rated investment grade.

contained in the indenture. The main provisions are: security, repayment, protective covenants, and call provisions.
Protective covenants are designed to protect bondholders from management decisions that favour stockholders at bondholders’ expense.
Most public industrial bonds are unsecured—they are general claims on the company’s value.
Most utility bonds are secured. If the firm defaults on secured bonds, the trustee can repossess the asset.

principal before maturity. This is usually accomplished with a sinking fund whereby a firm retires a certain number of bonds each year.
Most publicly issued bonds are callable. There is no single reason for call provisions. Some sensible reasons include taxes, greater flexibility, and the fact that callable bonds are less sensitive to interest-rate changes.
There are many different types of bonds, including floating-rate bonds, deep-discount bonds, and income bonds.