Long-Term Debt

Июль 26, 2022

Содержание

2. Chapter 20 Long-Term Debt 20.1 Long Term Debt: A Review 20.2 The Public Issue of Bonds
3. 20.1 Long Term Debt: A Review Corporate debt can be short-term (maturity less than one year)
4. Features of a Typical Bond The indenture usually lists Amount of Issue, Date of Issue, Maturity
5. Features of a Hypothetical Bond
6. 20.2 The Public Issue of Bonds The general procedure is similar to the issuance of stock,
7. Principal Repayment Term bonds versus serial bonds Sinking funds: How do they work? Fractional repayment each
8. Protective Covenants Agreements to protect bondholders Negative covenant: Thou shalt not: pay dividends beyond specified amount
9. The Sinking Fund There are many different kinds of sinking-fund arrangements: Most start between 5 and
10. The Call Provision A call provision lets the company repurchase or call the entire bond issue
11. 20.3 Bond Refunding Replacing all or part of a bond issue is called refunding. Bond refunding
12. Should firms issue callable bonds? Common sense tells us that call provisions have value. A call
13. Why are callable bonds issued in the real world? Four specific reasons why a company might
14. Callable Bonds versus Noncallable Bonds Most bonds are callable; some sensible reasons for call provisions include:
15. Calling Bonds: When does it make sense? In a world with no transaction costs, it can
16. 20.4 Bond Ratings What is rated: The likelihood that the firm will default. The protection afforded
17. Bond Ratings: Investment Grade
18. Bond Ratings: Below Investment Grade
19. Junk bonds Anything less than an S&P “BB” or a Moody’s “Ba” is a junk bond.
20. 20.5 Different Types of Bonds Callable Bonds Puttable Bonds Convertible Bonds Zero Coupon Bonds Floating-Rate Bonds
21. Puttable bonds Put provisions Put price Put date Put deferment Extendible bonds Value of the put
22. Convertible Bonds Why are they issued? Why are they purchased? Conversion ratio: Number of shares of
23. Convertible Bond Prices
24. Example of a Convertible Bond
25. More on Convertibles Exchangeable bonds Convertible into a set number of shares of a third company’s
26. Example of an Exchangeable Bond
27. Zero-Coupon Bonds A bond that pays no coupons at all must be offered at a price
28. Floating Rate Bonds With floating rate bonds, the coupon payments are adjustable.The adjustments are tied to
29. Financial Engineering and Bonds Income bonds: coupon payments are dependent on company income. Retractable bonds: allow
30. 20.6 Direct Placement Compared to Public Issues There are two basic forms of direct private long-term
31. 20.7 Long-Term Syndicated Bank Loans A syndicated loan is a corporate loan made by a group
32. 20.8 Summary and Conclusions The details of the long-term debt contract are contained in the indenture.
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Chapter 20 Long-Term Debt
20.1 Long Term Debt: A Review
20.2 The Public

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

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20.1 Long Term Debt: A Review
Corporate debt can be short-term (maturity

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

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Features of a Typical Bond
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
Features that may change over time
Rating
Yield-to-Maturity
Market price

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Features of a Hypothetical Bond

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20.2 The Public Issue of Bonds
The general procedure is similar to

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

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Principal Repayment
Term bonds versus serial bonds
Sinking funds: How do they work?
Fractional

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

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Protective Covenants
Agreements to protect bondholders
Negative covenant: Thou shalt not:
pay dividends beyond

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

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The Sinking Fund
There are many different kinds of sinking-fund arrangements:
Most start

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.

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The Call Provision
A call provision lets the company repurchase or call

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.

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20.3 Bond Refunding
Replacing all or part of a bond issue is

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?

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Should firms issue callable bonds?
Common sense tells us that call provisions

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.

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Why are callable bonds issued in the real world?
Four specific reasons

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

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Callable Bonds versus Noncallable Bonds
Most bonds are callable; some sensible reasons

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

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Calling Bonds: When does it make sense?
In a world with no

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.

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20.4 Bond Ratings
What is rated:
The likelihood that the firm will default.
The

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.

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Bond Ratings: Investment Grade

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Bond Ratings: Below Investment Grade

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Junk bonds
Anything less than an S&P “BB” or a Moody’s “Ba”

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

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20.5 Different Types of Bonds
Callable Bonds
Puttable Bonds
Convertible Bonds
Zero Coupon Bonds
Floating-Rate Bonds
Other

Types of Bonds

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Puttable bonds
Put provisions
Put price
Put date
Put deferment
Extendible bonds
Value of the put feature
Cost

of the put feature

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Convertible Bonds
Why are they issued?
Why are they purchased?
Conversion ratio:
Number of shares

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

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Convertible Bond Prices

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Example of a Convertible Bond

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More on Convertibles
Exchangeable bonds
Convertible into a set number of shares of

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.

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Example of an Exchangeable Bond

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Zero-Coupon Bonds
A bond that pays no coupons at all must be

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).

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Floating Rate Bonds
With floating rate bonds, the coupon payments are adjustable.The

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.

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Financial Engineering and Bonds
Income bonds: coupon payments are dependent on company

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.

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20.6 Direct Placement Compared to Public Issues
There are two basic forms

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.

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20.7 Long-Term Syndicated Bank Loans
A syndicated loan is a corporate loan

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.

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20.8 Summary and Conclusions
The details of the long-term debt contract are

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.

Long-Term Debt

Содержание

Chapter 20 Long-Term Debt20.1 Long Term Debt: A Review20.2 The Public

20.1 Long Term Debt: A ReviewCorporate debt can be short-term (maturity

Features of a Typical BondThe indenture usually listsAmount of Issue, Date

Features of a Hypothetical Bond

20.2 The Public Issue of BondsThe general procedure is similar to

Principal RepaymentTerm bonds versus serial bondsSinking funds: How do they work?Fractional

Protective CovenantsAgreements to protect bondholdersNegative covenant: Thou shalt not:pay dividends beyond

The Sinking FundThere are many different kinds of sinking-fund arrangements:Most start

The Call ProvisionA call provision lets the company repurchase or call

20.3 Bond RefundingReplacing all or part of a bond issue is

Should firms issue callable bonds?Common sense tells us that call provisions

Why are callable bonds issued in the real world?Four specific reasons

Callable Bonds versus Noncallable BondsMost bonds are callable; some sensible reasons

Calling Bonds: When does it make sense?In a world with no

20.4 Bond RatingsWhat is rated:The likelihood that the firm will default.The