Raising Capital (W8) Flashcards
Indenture
Contract between bond issuer and trust company representing the bond holders’ interests
Security (2)
Collateral - financial securities or asset pledged to secure loan
Mortgage securities - secured by real property
(Bondholders’) Seniority
Bondholders’ are priority
Typical Bond Covenants (4)
Issuing new debt
Dividends and share repurchases
Mergers and Acquisitions
Asset Disposition
Bond Risk Categories (Highest/Lowest)
Aaa (Moody’s) or AAA (S&P/Fitch) = highest quality
C (Moody’s) or D (S&P/Fitch) = in default
Bond Redemption Features (Provisions) (3)
Put Provisions
Call Provisions
Convertibility Provisions
Call Provisions
Issuer has the option to repurchase all or part of the debt at or after a certain date –> valuable to issuer higher coupon rate and promised yield
Put Provisions
Debt holder has the option to sell the debt to the company when certain exercise provisions are met –> valuable to debt holder, expect such debt to provide lower coupon rate and promised yield
Convertibility Provisions
Debt can be converted into equity securities (ordinary shares) of the issuing firm at a set conversion ratio –> valuable to debt holders = lower coupon rate and promised yield
Two Types of Bank Loans
Lines of Credit - setting a max amount bank willing to left
Syndicated loan - very large bank may arrange loan with a firm and then sell portions of the loan to a syndicate of other banks
Angel Investors
Individual investors who buy equity in small private firms
Venture Capital Firms
Financial intermediaries that are typically set up as limited partnerships, do not want to own their investment forever.
Institutional Investors
Pension funds, insurance companies, endowments etc.
IPO
Initial Public Offering
First issue of shares by newly listed company on stock exchange
Where most companies typically raise their equity funding
Reasons for IPO Under Pricing (4)
Ensures issues are fully subscribed
Attract knowledgable investors, expecting others to follow lead
Counteract winners curs, where informed investors crowd out uninformed invesots
Provide benefit to investors so they will support future share issues
Dutch Action Underwriting
Underwriter accepts a series of bits that include number of shares and price per share
Price that everyone pays is the price that will result in all shares being sold = incentive to bid high to make sure you get in on the auction
Agency Problem of Issuing
Underwriter earns commission based on aggregate value meaning there is incentive to set the price high.
If unsuccessful, no commission = incentive for low price
Cost of a public issue
5-10% of amount raised, lower proportional costs for larger issues
Seasoned Equity Offerings (SEO)
New shares issuances by public firms after IPO
Forms of SEOs (3)
Rights Issues
Private Placement
Public Issue
Rights Issue
Issue of ordinary shares to existing shareholders, allows for current shareholders to avoid the dilution effect.
Rights are given to shareholders specifying (3)
Number of shares that can be purchased
Purchase price
Time frame
Shareholders can either…
exercise their rights or sell them (tradable/renounceable rights)
Subscription Price
Price that must be paid to obtain new shares issued under rights issue
Ex-rights Date
Date on which a share begins trading ex-rights, right not attached to shares from or after this date, expect price to fall.
Cum-rights
When shares are traded cum–rights, buyer entitled to participate in forthcoming rights issue
Why do you expect price to fall on ex-rights date? (2)
Share no longer carries the right
Dilution of share capital after the rights issue
Private Placement
Issue for large parcels of shares to institutional investors or clients of a stockbroker
Characteristics of Public Placement (4)
Issued at a discount to encourage investors to acquire large parcel
No registration/underwriter required
Low-cost
Disliked by existing shareholders
Net Change in Firm Value due to Equity/Debt Issues
Project NPV +/- Value Effect of Financing Choice
Reason firm value can be more/less affected is asymmetric information/signalling effect.
