Corporate Finance

15.2.
Corporate Long-term Debt
Equity securities
Securities issued by
corporations
Debt securities
Differences between Debt and Equity
• Not an ownership interest. • Ownership interest.
• Creditors do not have voting E • Common stockholders vote
rights. for the board of directors and
D • Interest is considered a cost Q other issues.
E of doing business and is tax U • Dividends are not considered
deductible. I a cost of doing business and
B • Creditors have legal are not tax deductible.
recourse if interest or T • Dividends are not a liability of
T principal payment are Y the firm, and stockholders
missed. have no legal recourse if
• Excess debt can lead to dividends are not paid
financial distress and • An all-equity firm can’t go
bankruptcy. bankrupt
o Distinction between Debt and Equity is
Is it Debt very important for tax purposes
or Equity o As a general rule, Equity represents an

ownership interest and is a residual claim.
This means that equityholders are paid
after debtholders. => The risk and
benefits associated with owning debt and
equity different.
Insert the title of your subtitle Here
Long-term Debt: BASICS
• The maturity of a long-term debt instrument is the length of time the debt remains
outstanding with some unpaid balance.
• Debt securities can be:

+ Short-term ( maturities of one year or less) -> Unfunded debt
+ Long-term ( maturities of more than one year)
• Debt securities are typically called notes, debentures, or bonds.
• Long-term debt can be issued to the public or privately placed.

- Privately places debt is issued to lender and not offered to the public.
What are notes, debentures, and bonds
01 Notes
Issues with an original maturity of 10 years or less
02 Debentures
An unsecured bond for which no specific pledge of property is made
03 Bonds
Longer-term issues
The Indenture
• The written agreement between the corporation ( the borrower ) and its creditors
=> Deed of trust
• The trust company must:

(1) make sure the terms of the indenture are obeyed.
(2) manage the sinking fund.
(3) represent the bondholders in default.
• The bond indenture is a legal document.

The bond indenture
The basic terms of the bond
01 A description of property
used as security
02
Seniority
03
The repayment arrangements
04
The call provisions
05 Details of the protective
covenants
06
The basic terms of the bond
01
• Corporate bonds usually have:
- Face value (denomination)
Ex: Corporate bonds have face value of $1000. This is called the principal value
and it is stated on the bond certificate. So if a corporation wanted to borrow $1 million,
1000 bonds would have to be sold.
- Par value (initial accounting value)
• Corporate bonds are usually in:
- Registered form
- Bearer form. There are 2 drawbacks to bearer bonds:
+ difficult to recover if they are lost or stolen
+ because company doesn’t know who owns its bonds, it cannot notify
bondholders of important event
=> Less common
A description of property used as
security
02
• Collateral: term that frequently means securities (for example, bonds and stocks)
that are pledge as security for payment of debt
• Mortgage securities: are secured by mortgage on real property of borrower.

=> Mortgage trust indenture or trust deed.
Real estate : land

or buildings
Seniority 03
• Preference in position over other lenders
• Debts are sometimes labeled as senior or junior
• Some debt is subordinated
In the event of default, holders of subordinated debt must give preference to

other specified creditors.
 Subordinated lenders will be paid off only after he specified creditors have
been compensated
The repayment arrangements
04
• A sinking fund: account managed by the bond trustee for purpose of repaying the
bond
Uses the funds to retire a
portion of debt
Company Trustee Trustee
Makes annual payment Does this by either

to buying up some of
bonds in market or
calling in a fraction of
the outstanding bonds
The call provisions
05
• Allows the company to repurchase, or “call” part or all of the bond issue at stated
prices
• The call price is above the bond’s stated value (par value). The difference is call
premium.
• Not operative during the first part of a bond’s life.

=> Deferred call provision (during the period of prohibition, the bond is said to be
call protected
Details of the protective
covenants
06
• A protective covenants in indenture or loan agreement affects certain corporate

actions
• Can be classified into 2 types:

- Negative covenant: limits or prohibits actions that company might take.
Ex: The firm must limit the amount of dividends it pays according to some
formula
- Positive covenant: specifies an action that company must take or a condition
Ex: Company must maintain is working capital at or above some specified
minimum level
15.3 Some Different
Types of Bonds
FLOATING-RATE
BONDS
• Floating-rate bonds (floaters) are the coup
on payments are adjustable or floating.
• The value of a floating-rate bond depends

on how the coupon payment adjustments
are defined.
For example: Mr. Duy mortgages 15 million VND

over 2 years with an interest rate of 0.8% / month
for the first 6 months. After that 6 months, interest
rates will float.
FLOATING-RATE
BONDS
In addition, the majority of floaters have
the following features:
• The holder has the right to redeem his note at

par on the coupon payment date after some
specified amount of time. This is called a put pro
vision, and it is discussed in the following section.
• The coupon rate has a floor and a ceiling, meanin

g that the coupon is subject to a minimum and a
maximum. In this case, the coupon rate is said to
be “capped,” and the upper and lower rates are
sometimes called the collar .
OTHER TYPES OF BONDS
Income bonds
01 Income bonds are similar to conventional bonds, except that coupon
payments are dependent on company income
A convertible bond
02 A convertible bond can be swapped for a fixed number of shares of
stock anytime before maturity at the holder’s option.
03 A put bond
A put bond allows the holder to force the issuer to buy the bond back at
a stated price.
COCO & NONO Bonds
Two of the most recent exotic bonds are CoCo bonds and NoNo bonds
CoCo bonds
01 CoCo bonds which have a coupon
payment
NoNo bonds
02 NoNo bonds are zero coupon bonds
CoCo and NoNo bonds are

03 contingent convertible, putable,
callable, subordinated bonds.
Lines of Credit
15.4
•
BANK Banks often provide a business customer with a line of
credit, setting the maximum amount that the bank is willing to
lend to the business. The business can then borrow the money
LOANS according to its need for funds.
• The credit line is generally referred to as a revolving line of

credit or a revolver.
Lines of Credit
15.4
BANK Example:
Imagine a revolver for $75 million with a three-year commitment (implying
LOANS that the business could borrow part or all of the $75 million anytime within the next
three years)
A commitment fee is generally charged on the unused portion of the revolver.
Suppose the commitment fee is 0.20% and the corporation borrows $25
million in a particular year, leaving $50 million unborrowed.
The dollar commitment fee would be:

0.20% x $50 = $100,000 (million)
for that year, in addition to the interest on the $25 million actually borrowed.
15.4 Syndicated Loans
BANK Large money-center banks frequently have more demand for loans than
they have supply however small regional banks are often in the opposite
situation. As a result, a lager money center bank may arrange a loan with a
LOANS firm or country and then sell portions of the loan to a syndicate of other
banks.
So, Sydicated loans is a form of loan business in which group of

lender who work together to provide funds for a single borrower.
For example, a transportation project, such as a high speed rail, may

involve a group of investors and lenders, each specializing in a portion of
the project, such as rail lines, cars, bridges and tunnels, and signal and
control technologies. The whole group is referred to as a syndicate.
15.5 INTERNATIONAL LOANS
EUROBOND FOREIGN BONDS
A Eurobond is a bond issued in Foreign bonds, unlike Eurobonds,

multiple countries but denominated in are issued in a single country and
a single currency, usually the issuer’s are usually denominated in that
home currency. country’s currency.
Example: Example:
A Canadian firm might issue yen-denominated
An American firm may issue a dollar- bonds in Japan.
denominated bond in a number of foreign
countries. Foreign bonds often are nicknamed for the
Such bonds have become an important country where they are issued: Yankee
way to raise capital for many international bonds (United States), Samurai bonds
companies and governments. (Japan), Rembrandt bonds (the Netherlands),
Bulldog bonds (Britain).

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15.2.

Corporate Long-term Debt

or Equity o As a general rule, Equity represents an

• Debt securities can be:

• Debt securities are typically called notes, debentures, or bonds.

• Long-term debt can be issued to the public or privately placed.

• The trust company must:

• The bond indenture is a legal document.

• Mortgage securities: are secured by mortgage on real property of borrower.

Real estate : land

• Debts are sometimes labeled as senior or junior

• Some debt is subordinated

In the event of default, holders of subordinated debt must give preference to

Company Trustee Trustee

Makes annual payment Does this by either

• Not operative during the first part of a bond’s life.

• A protective covenants in indenture or loan agreement affects certain corporate

• Can be classified into 2 types:

• The value of a floating-rate bond depends

For example: Mr. Duy mortgages 15 million VND

• The holder has the right to redeem his note at

• The coupon rate has a floor and a ceiling, meanin

CoCo and NoNo bonds are

• The credit line is generally referred to as a revolving line of

A commitment fee is generally charged on the unused portion of the revolver.

The dollar commitment fee would be:

So, Sydicated loans is a form of loan business in which group of

For example, a transportation project, such as a high speed rail, may

EUROBOND FOREIGN BONDS

A Eurobond is a bond issued in Foreign bonds, unlike Eurobonds,

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