Corporate Debt Flashcards
3 Sources of debt capital for companies:
Bank loans and syndicated loans
Commercial paper
Corporate notes and bonds
Bilateral loan
• A bilateral loan is from a single lender to a single
borrower.
• Bank loans are the primary source of debt
financing for small and medium-size companies (because they do not have enough credit worthiness)
as well as for large companies in countries where
bond markets are underdeveloped.
Syndicated loan
• A syndicated loan is from a group of lenders,
called the “syndicate,” to a single borrower.
• Syndicated loans are primarily originated by
banks, and the loans are extended to companies
but also to governments and government-related
entities.
What are commercial papers?
• Commercial paper is a short-term, unsecured
promissory note issued in the public market or via
a private placement that represents a debt
obligation of the issuer.
• It is a valuable source of flexible, readily available,
and relatively low-cost short-term financing.
• It is a source of funding for working capital and
seasonal demands for cash.
• The maturity of commercial paper can range from
overnight to one year, but a typical issue matures in
less than three months.
• The largest issuers of commercial paper are financial
institutions, but some non-financial companies are
also regular issuers of commercial paper.
• Most commercial paper is of high credit quality.
What is rollver risk?
In most cases, maturing commercial paper is paid with proceeds
of new issuance of commercial paper, a practice known as “rollover” commercial paper.
• However, the risk is that the issuer may not be able to roll over, known as rollover risk.
How to prevent rollover risk
• To prevent rollover risk, issuer could choose to secure backup lines of credit from an issuer’s relationship bank.
Line of credit (LC):
• an amount of predetermined credit
extended to a borrower from its bank. The common maturity is five-year for borrowing companies in the United States.
• Within the maturity, the borrowing companies can withdraw partial or full amount of the credit at any time.
Why is the yield of commercial paper higher- than the yield of same short-term sovereign bonds?
• This is because two reasons. First, commercial papers are exposed to default risk of the issuing firms. Second, commercial papers are less liquid to trade than sovereign bonds.
What are eurocommercial papers?
• Commercial papers issued in the international market is known as Eurocommercial paper.
What are the characteristics of corporate notes/bonds?
Can be privately placed or sold in public markets
Range in maturity from 1 to over 30 years
May have fixed, floating, payment-in-kind (PIK), or zerocoupon structures
May have a serial or term maturity structure
May be unsecured or backed by collateral of various forms
May have various contingency provisions
Mostly traded over the counter
