Ch 7.1: Debt Instruments Flashcards
Characteristics of corporate debt
Bonds or loans;
Shot-term vs long-term debt;
Private or public markets;
Secured, unsecured or subordinated debt;
Asset-specific or general funding;
etc.
Loans: commited vs uncommited credit facilities
With an uncommitted credit facilty a bank agrees to lend to a counterparty, but can renege on that commimtment at any point. [similar to a put option]
With a committed credit facility a bank engages its capital during the entire period of the agreement.
Bilateral vs syndicated loans
Bilateral - single bank, single corporate
Syndicated - multiple banks, single corporate
Arranger [syndicated loans]
The arranger coordinates all negotiations, payments and administration between the parties during the life of the loan.
Key types of syndicated loans/credits
Term loans
Revolving credit facilites
Term loan typical characteristics
Committed credit facility
Up to 10 years, commercial paper (maturity less than a year)
Bullet maturity/amortizing loan
Floating rate
Used for fixed assets, e.g property, plant, equipment
Revolving credit facility characteristics
Commited or uncommirred credit facility
Similar to a term loan but offers more flexibility in terms of drawdown, repayment and re-drawdown (drawdown is taking new loan or rolling an old one)
Used for working capital, e.g. inventories, receivables
Standby credit facilities are an uncommitted version of revolving credit
What is an indenture?
An indenture is the contract governing a bond issue.
The provisions of an indenture are verified by a trustee during the life of the bond as a representative of the interests of the bondholders.
LBO stands for a …
… leveraged buyout
What is jumbo?
A very large bond issue.
What is jumbo?
A very large bond issue.
What are book runners?
Book runners are the lead underwriters selected to place the new issuance of bonds with investors.
What is the role of the trustee?
The trustee verifies the indenture during the life of the bond as a representative of the interests of the bondholders.
What the requirements for financial statements for corporates with public debt?
The corporate has to present audited financial statements on an annual basis and unaudited ones on a quarterly basis.
Other requirements may include a descripiton of the risks associated with the issuer and the business environment, information on the highest salaries wiithin the firm, etc.
What is a note?
A note is the generic term for plain vanilla bonds.
What is a debenture?
A debenture is usually unsecured long-term debt.
What is a lien?
The right to keep posession of a property belonging to another person until a debt owed by that person is repaid.
What is an equipment trust certificate (ETC)?
An ETC is used to finance for example cars, locomotives or airplanes and are collateralized by the equipment in question.
What is a bullet bond?
A bullet bond is a zero coupon bond.
Accrued interest and principle are paid at maturity.
What are medium-term notes program (MTNs program)?
MTN’s are a form of flexible financing available to borrowers with high to very high credit quality, as a longer term extension of the commercial paper market.
Dealers have no underwriting obligations and distribute MTNs on a best effort basis.
Once a borrower has registered an MTN program wtth the SEC, a borrower can enter the MTN market with offerings of different sizes and different coupon for different maturities.
Typically drawdowns from MTN programs are much smaller than standard bond issues, ranging between $20m and $50m.
What are private placements?
Private placements are halfway between loans and bonds.
Their term is typically of longer duration (up to 30y) and they are placed primarily with insurance companies.
Flexible documentation and disclosure requirements.
Private placements are not always rated by credit rating agencies.
2 types of private placements
True private placements are bilateral arrangements between a borrower and a creditor (an insurance company). They are collateralized and documentation and disclosure requirements are flexible.
A 144A security is a private placement with standardized documentation that can be traded by professional investors but that retail investors are barred from trading. Most are rated by credit rating agencies. 144A can be registered with the SEC. Registered 144A securities should be treated like bonds or debentures.
What are convertables?
Convertables are a debt instrument that can be exchanged for a specified number of common shares at a predetermined conversion ratio when the holder decides to do so. Maturity does not exceed 10y.
The debt is normally issued by:
- R&D firms such as high-tech or biotech firms with much upside potential in case of success.
- Firms in the midst of restructuring with much upside potential in case of success.
- Healthy firms that believe their stock is undervalued, thereby delaying equity financing.
What is a hybrid?
Hybrids combine bond and equity characteristics.
The most widely used hybrids are convertible bonds and prefferred stocks.
What is a convertible preference/preferred stock?
A convertible preference share pays dividends at a fixed/floating rate before common stock dividends are paid and can be exchanged into common shares.
What is a commercial paper program (CP program)?
Maturity less than 1y.
Available only to the most creditworthy corporates.
Unsecured debt.
Proceeds normally used to finance working capital.
Bonds vs loans charachteristics
Loans have a more flexible underwriting process.
Bonds have longer terms than loans.
Bonds tend to pay fixed rates while loans tend to pay floating rates.
Bonds are tradable in the secondary market whyle loans are more illiquid.
Types of leases?
Capital leases are used to finance equipment purchases and are generally on-balance-sheet financings, as they are fully amortized and are not cancelable.
Operating leases are more akin to rent. They are generally not fully amortized and contain a cancellation clause allowing the lesse to return the quipment before the expiration of the contract. Therefore operational leases are often off-balance-sheet liabilities.
What is factoring?
A form of receivables financing.
Factoring is done through the assignment of receivables to a factoring company, which pays the assignor immediately, discounting the amount to reflect the collection time and risk.
What is a securitization?
Securitization is the financial practice of pooling various types of contractual debt and selling their related cash flows to investors as securities (bonds, pass-through certificates or CDOs/CLOs/agencies/RMBS/CMBS/ABS).
Securitization is similar to factoring, but securitizations do not make use of a third party. Receivables are rather sold directly to the end investors.
Securitization is a financing technique that is widely used by financial intermediaries (banks) to monetize financial assets.
Types of corporate debt
Loans - bilateral, syndicated
Commercial Paper Programs (1y)
Medium-Term Notes Programs
Notes, Bonds, Debentures
Private Placements - true private placements, 144A securities
Hybrids - convertibles, preference stock
Lease financing, Factoring, Securitizations
