18.4: Long-Term Debt and the Money Market Flashcards
What does long-term financing generally refer to, and what is it often called?
Long-term financing generally refers to any debt issued with a term longer than one year. It is often called “funded” debt.
What are the typical requirements for long-term public debt issues?
The requirements typically include:
- Annual information form
- Audited financial statements
- Unaudited six-month statements
- Any other information filed with the securities commission after the date of the prospectus but before the termination of the offering
What is a transfer agent, and what do they do?
A transfer agent is a company that handles the day-to-day administration of securities and maintains records, including purchases, sales, and account balances.
What is the meaning of purchase-money mortgages?
Purchase-money mortgages are mortgages that constitute all or part of the compensation received for the sale of property; used when the seller is also the lender.
Define unsubordinated debt.
Unsubordinated debt refers to unsecured debt that ranks first with the company; no other unsecured debt ranks ahead of it.
What actions could trigger default according to the BC Gas indenture?
Actions that could trigger default include:
- Nonpayment of principal when due
- Nonpayment of interest after 30 days
- An order for the winding up or liquidation of the firm
- Issuance of a general assignment of debts or declaration of bankruptcy
- Nonpayment after 45 days of any execution enforced against the property of the company
- Default on its first mortgage bonds or purchase-money mortgages
- Violation of a covenant provision and failure to make good on such a violation in 60 days
What is a cross-default clause?
A cross-default clause indicates that default on one obligation also constitutes default on another.
What are the major covenants referred to in Clause 7 of the BC Gas MTN indenture?
A: The major covenants are:
1. BC Gas will not “mortgage, pledge, charge, or otherwise encumber” any of its assets unless the MTNs are given the same security.
2. BC Gas will not guarantee any debt that is not necessary for carrying on its existing business.
3. The company will not issue any additional debt unless its earnings in 12 of the past 23 months satisfy a 2.0 times interest coverage ratio after the new debt has been issued and other debt retired.
4. The company will maintain its facilities for the supply of gas to enable it to carry on its business and will not sell shares that cause certain designated subsidiaries to cease to be subsidiaries.
What is a negative pledge clause?
A negative pledge clause stipulates that a borrower may not create higher-priority debt without giving the other debt holders the same security.
What does the interest coverage restriction (ICR) ensure under the BC Gas MTN indenture?
The ICR ensures that BC Gas will not make the existing MTNs riskier by making sure the firm does not issue so much debt that the interest coverage ratio drops below 2.0.
The ICR is calculated by taking the earnings before interest and taxes (EBIT) and dividing this figure by the interest payments.
Why is the discussion of a bond issue by a major Canadian company important?
It emphasizes that bonds are a contractual obligation.
The bond contract is a contract, and the company cannot violate its terms without the trustee taking them to court or forcing them to negotiate.
Define mortgage bonds, secured debentures, unsecured debentures, and subordinated debt.
- Mortgage bonds: Bonds secured by a mortgage on the company’s property.
- Secured debentures: Bonds secured by a lien on specific assets of the company.
- Unsecured debentures: Bonds not secured by specific assets.
- Subordinated debt: Debt that is repaid after other debts in the case of liquidation.
What is the rationale for including debt covenants in a public issue?
Debt covenants protect the interests of the bondholders by restricting the actions of the issuing company to reduce risk and ensure the company’s financial stability.
Briefly describe negative pledge and cross-default clauses.
- Negative pledge clause: Prevents the borrower from creating higher-priority debt without giving the same security to existing debt holders.
- Cross-default clause: Indicates that default on one obligation also constitutes default on another.
