2.2.1.2. Long-Term Debt and Liabilities Flashcards
Definition | Private Debt
debt that is not publicly traded, often a bank loan (also: not rtraded on stock exchange)
Definition | Term Loan (private debt)
loan that lasts for a specific term
Definition | Syndicated Bank Loan (private debt)
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- single loan that is funded by a group of banks rather than just a single bank
- usually, one of the member of the syndicate (the lead bank) negotiates the terms of the bank loan
Definition | Revolving Line Of Credit (private debt)
credit commitment for a specific time period up to some limit, which a company can use as needed
Definition | Private Placement (private debt)
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- a bond issue that does not trade on a public market but rather is sold to a small group of investors
- does not need to be registered, therefore is less costly to issue
Description | Unsecured Bonds vs Secured Bonds
U: in the event of a bankruptcy bondholders have a clsim to only the assets of the firm that are not already pledged as collateral on other debt
S: in the event of a bankruptcy bondholders have a claim to the assets pledged as collateral to that specific bond
Types of Unsecured Bonds
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- notes | typically, notes have maturities less han 10 years
- debentures | longer maturities
Types of Secured Bonds
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- mortgage bonds | secured by real property
- asser-backed bonds | secured by any kind of asset
What is a subordinated debenture?
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- if more than one debenture outstanding, the bondholders prioritxy in claiming assets in the vent of default is important
- most debenture issues contain clauses restricting the companyx from issuing new debt with equal or higher priority than existing debt
- when a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as SD
Definition | Covenants
restricitve clauses in a bond contract that limit the issuer from taking actions that may undercut its abilities to repay the bonds
What are the types of private debt?
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- term loan
- syndicated bank loan
- revolving line of credit
- private placement
Bond Covenants | Definition
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- bond agreements containing covenants that restrict the ability of management to pay dividends
- other covenants ,ay restrict the level of further indebtness and specify that the issuer must maintain a minimum amount of working capital
- the the issuer fails to live up to any covenant, the bond goes into default
Examples of Bond Covenants
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- information covenants (providing quarterly and annual reports within certain period or providing budget data)
- financial covenants (leverage, equity ratio, interest cover, minimum liquidity)
- general covenants (restrictions on dividends to shareholders, restrictions on disposition of assets or shareholdings)
Sovereign Debt and Types | Definition
- a debt issued by national governments
- securities issued by the US Treasury: Bills (discount), notes, bonds, inflation indexed (coupons)
What is TIPS?
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- inflation indexed (security) issued by the US Treasury
- treasury inflation protected securities
- fixed coupon rate, but outstanding principal adjusted for inflation
- RATE is fixed, but dollar coupon varies because semiannual coupon payments are fixed rate of the inflation adjusted principal
Call Provisions | Call Date and Call Price
- call feature allows the issuer of the bond the right to retire all outstanding bonds on or after a specific date, the call date, for the call price
A callable bond has a….. than an otherwise equal non-callable bond
lower price
The yield to maturity of a callable bond is calculated as if the bond…..
were not callable
- Bond traders often quote the yield to call (YTC) because…
- The YTC is…
- … the assumption that the bond will not be called is not always realistic
- …the annual yield of a callable bond assuming that the bond is called at the earliest opportunity
Convertible Provisions | Convertible Bonds and Conversion Ratio
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- a way that bonds are retired is by converting them into equity
- some corporate bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock at a ratio called the conversion ratio
- such bonds are called convertible bonds
often companies issue convertible bonds that are…
… callable
By calling the convertible and callable bonds, a company can force bondholders to make their decision to…
… exercise the conversion option earlier than they would otherwise like to
- A convertible bond is worth….. than a otherwise identical straight bond
- Consequently, if both bonds are issued at par, the non-convertible bond must offer a…
- A huge misunderstanding is that many people point to the lower interest rates of convertible bonds and argue that therfore convertible debt is….. than straight debt
- more
- higher interest rate
- cheaper
Leasing | Definition
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- a contract between two parties: lessee and lessor
- lessee: liable for periodic payments in exchange for the right to use the asset
- lessor: owner of the asset, who is entitled to the lease payments in exchange for lending the asset
- legally, not debt financing, but economically very similar effects - thus, also referred to as a credit substitute
Leasing | Benefits for the Lessee
- most leases involve little or no upfront payment
- lease payments operational costs and thus immediately tax deductible for lessee
What is meant by “outstanding principal”?
- e.g. lend $100, expect $100 back
- if inflation linked, you get more back
- basically, paying back more of what you expected
