Corporate Debt Market (10) Flashcards
What is the CORPORATE DEBT MARKET?
THE BOND MARKET: all those markets where the different types of securities issued by companies/ public bodies are traded.
- return is pre-defined (≠ fixed)
- coupons
ADVANTAGES OF ISSUING DEBT
- fiscal benefits (interest payments are tax deductible )
- greater managerial discipline (debt forces managers not to become complacent neither inefficient)
DRAWBACKS OF ISSUING DEBT
- cost of bankruptcy both direct (legal costs) and indirect (arise because you are perceived to be in financial difficulties)
- agency costs
whenever you hire someone to do something and there are differences in interests - loss of future flexibility
losses all flexibility in financing future projects with debt
SHARES ≠ DEBT
SHARES
- low priority CF
- last in the order of creditors
- dividends aren’t tax deductible
- infinite term + managerial control
DEBT
- high priority CF
- priority in the order of creditors
- interest payments are tax deductible
- no managerial control
INSTRUMENTS in the CORPORATE DEBT MARKET
FIXED INCOME SECURITIES
issuer pledges to pay a cash flow in periodic payments, and a repayment of the principal at the end, while the buyer makes one-off cash payments
- ST fixed Y security: COMMERCIAL PAPER
< 18 months
issued at discount with no coupons - MT/LT fixed Y security: NOTES and BONDS
note: 3-5 years
bond: + 5 years
issued at par (with premium) with coupons, via auction or syndicate
issue formats of COMMERCIAL PAPERS
Programmed issues:
- periodical competitive and/or bespoke auction
- similar to public debt
- open (any entity) / closed auction (only programmed list)
- IR EURIBOR linked
- low NV < 1000
Non-scheduled issues:
- Bespoke issues (private placement, agreed conditions)
- less transparent pricing process
- higher speed
- higher NV
issue formats of NOTES and BONDS
underwriting (syndicated) - similar to IPO
- issuer contracts a syndicate of financial bodies who pledge to provide the volume of funds required.
competitive tender - similar to Public Debt
- less relevant in Spain, issuer receives bids for P and volume, and takes all at the offered P.
MORTGAGE BONDS
Bonds that are secured with loans, their P is tied to the market IR level for deposits.
They are very useful for banks since they’re LT…
- higher IR
- lower liquidity risk
SECURITISED BONDS
The bank “bundles” a set of loans on its BS, “securitisation fund”, the bank places this package of instruments in a vehicle: The Securitization Fund (guarantee)
CoCos
Contingent Convertible Bonds
Generally hybrid bonds between debt and principal, the interest is paid to the investor, and in addition there is the option to convert this bonds into shares
TYPES OF BONDS
SECURED BONDS
collateral attached, tangible good more easily marketed.
- lower IR, lower risk
UNSECURED BONDS
LT bonds backed only with the general creditworthiness of the issues. If default –> court.
- higher IR
- lower priority
- contrary that spells out responsibilities of management
JUNK BONDS
At or above Moody’s Baa, Standard and Poor’s BBB rating are considered of investment grade. Those below are considered speculative.
- high default risk
the SECONDARY MARKET
electronic and automated trading has become increasingly important
- HFT, AT
- shaping the process of P formation and the nature of liquidity provision
- changes in the nature of intermediation
- new market participants
factors supporting the rise of electronic trading?
- reduction in trading costs
- changes in D for liquidity
- regulatory reform
MTS BondsPro?
is an electronic trading platform that offers access to liquidity and real-time execution on tis anonymous, all-to-all order book.
- access to extensive dealer network with unique inventory
- global liquidity
- free to provide liquidity
- full depth of market displayed
AIAF
THE ASSOCIATION OF INTERMEDIARIES FOR FINANCIAL INSTRUMENTS
biggest trading market for both wholesale and retail trades
