Debt Offerings

Question 1

What is a debt security?

Answer 1

A promise by a borrower to repay money to a party (the lender, creditor or investor) that has loaned it money, usually with interest.

Question 2

What are the four main types of debt securities?

Answer 2

(1) Treasury securities.
(2) Federal agency securities.
(3) Municipal securities.
(4) Corporate debt securities

Question 3

What are the major types of corporate debt securities?

Answer 3

(1) Commercial paper - short-term debt securities generally used to fund short-term liquidity needs. Commercial paper is generally designated as a money market instrument.
(2) Medium-term notes (MTNs) - typically issued under medium-term note programs and usually have a maturity of between two and five years, although other maturities are possible.
(3) Other types of bonds or notes, which are debt securities with terms as long as 30 years or more.

Question 4

What is a bond?

Answer 4

Debt instruments (typically long-term) in which the issuing company or governmental body promises to pay the holders a specified amount of interest for a specified length of time and to repay the principal amount of the loan at maturity. Typically secured by collateral.

Question 5

What is a debenture?

Answer 5

Long-term debt instruments used by governments and large companies to obtain funds. Typically NOT secured by collateral.

Question 6

What are notes?

Answer 6

Debt instruments with a short-term maturity of between one and ten years. Notes also generally refer to any written promise to pay a specified amount to a certain entity on demand or on a specified date.

Question 7

Short-term notes (Commercial Paper)

Answer 7

One to 12 months.

Question 8

Medium-term notes

Answer 8

One to five years.

Question 9

What are three ways interest rates are calculated?

Answer 9

(1) Fixed rate

(2) Floating rate, using one of the following as a base:
(a) LIBOR
(b) prime rate
(c) Treasury rate
(d) EURIBOR rate

(3) Zero coupon
Debt sold at a discount but repaid at face value of the note.

Question 10

Senior vs. subordinated debt

Answer 10

Senior - higher priority creditor

Subordinated - lower priority creditor

Question 11

Secured vs. unsecured

Answer 11

Secured - debtholder has access to creditor assets

Unsecured - debtholder has no access to assets

Question 12

Guaranteed vs. non-guaranteed

Answer 12

Means subsidiary of creditor acts as guarantor in case creditor fails to repay.

Question 13

Rated vs. non-rated

Answer 13

Rated - a credit agency has rated the debt as investment or non-investment grade

Investment grade - more likely to repay

Non-investment grade (high yield) - lower likelihood of repayment (higher risk/ higher return)

Question 14

Bearer or registered form debt

Answer 14

Bearer - ownership transferred by physical delivery

Registered - ownership transferred by a recording. These are in global form and represent the whole of the debt issued and is held by a depositary on behalf of the holders (i.e. DTC).

Question 15

What other issues should be considered in debt issuances?

Answer 15

(1) Covenants
(2) Repayment terms (i.e. prepayment)
(3) Registered vs. unregistered

Registered - Indenture exist? Shelf registrations possible?

Unregistered - What exemption claimed? How many initial holders? Sophistication?

(4) US vs. international offering
(5) Listed or unlisted?

Listed debt is more liquid

Question 16

High yield vs. investment grade bonds

Answer 16

(1) Higher interest rates
(2) Often guaranteed by domestic subsidiaries and even parent company
(3) Eligible for voluntary redemption at halfway point to maturity date at a premium
(4) More restrictive covenant and fewer carve-outs
(5) More likely to have covenants measuring financial position
(6) Often unregistered