1、Issuing Securities to the Public,Key Concepts and Skills,Understand the characteristics and terms of a standard bond. Understand callable bonds and the process of bond refunding. Compare and contrast different types of bonds such as floating rate, deep discount, and income bonds.,Chapter Outline,20.

2、1 Long-Term Debt: A Review 20.2 The Public Issue of Bonds 20.3 Bond Refunding 20.4 Bond Ratings 20.5 Some Different Types of Bonds 20.6 Direct Placement Compared to Public Issues 20.7 Long-Term Syndicated Bank Loans,20.1 Long-Term Debt: A Review,Corporate debt can be short-term (maturity less than o

3、ne year) or long-term. Different from common stock: Creditors claim on corporation is specified Promised cash flows Most are callable Over half of outstanding bonds are owned by life insurance companies & pension funds. Plain vanilla bonds vs. “kitchen sink” bonds,Features of a Cisco Systems Bond,20

4、.2 The Public Issue of Bonds,The general procedure is similar to the issuance of stock, as described in the previous chapter. The indenture, which is specific to bonds, is a written agreement between the borrower and a trust company. The indenture usually lists: Amount of Issue, Date of Issue, Matur

5、ity Denomination (Par value) Annual Coupon, Dates of Coupon Payments Security Sinking Funds Call Provisions Covenants,Protective Covenants,Agreements to protect bondholders Negative covenant: Thou shalt not: pay dividends beyond specified amount sell more senior debt & amount of new debt is limited

6、refund existing bond issue with new bonds paying lower interest rate buy another companys bonds Positive covenant: Thou shalt: use proceeds from sale of assets for other assets allow redemption in event of merger or spinoff maintain good condition of assets provide audited financial information,Prin

7、cipal Repayment,Term bonds versus serial bonds Sinking fundshow do they work? Fractional repayment each year Good newssecurity Bad newsunfavorable calls How trustee redeems,The Sinking Fund,There are many different kinds of sinking-fund arrangements: Most start between 5 and 10 years after initial i

8、ssuance. Some establish equal payments over the life of the bond. Most high-quality bond issues establish payments to the sinking fund that are not sufficient to redeem the entire issue. Sinking funds provide extra protection to bondholders. Sinking funds provide the firm with an option.,20.3 Bond R

9、efunding,Replacing all or part of a bond issue is called refunding. Bond refunding raises two questions: Should firms issue callable bonds? Given that callable bonds have been issued, when should the bonds be called?,Callable Bonds versus Noncallable Bonds,Most bonds are callable. Some sensible reas

10、ons for call provisions include: taxes, managerial flexibility and the fact that callable bonds have less interest rate risk.,20.4 Bond Ratings,What is rated: The likelihood that the firm will default The protection afforded by the loan contract in the event of default Who pays for ratings: Firms pa

11、y to have their bonds rated. The ratings are constructed from the financial statements supplied by the firm. Ratings can change, and raters can disagree.,Bond Ratings: Investment Grade,Bond Ratings: Below Investment Grade,Junk Bonds,Anything less than an S&P “BB” or a Moodys “Ba” is a junk bond. A p

12、olite euphemism for junk is high-yield bond. There are two types of junk bonds: Original issue junkpossibly not rated Fallen angelsrated Current status of junk bond market Private placement Yield premiums versus default risk,20.5 Different Types of Bonds,Callable Bonds Put Bonds Convertible Bonds De

13、ep Discount Bonds Income Bonds Floating-Rate Bonds,Put Bonds,Put provisions Put price Put date Put deferment Extendible bonds Value of the put feature Cost of the put feature,Convertible Bonds,Why are they issued? Why are they purchased? Conversion ratio: Number of shares of stock acquired by conver

14、sion Conversion price: Bond par value / Conversion ratio Conversion value: Price per share of stock x Conversion ratio In-the-money versus out-the-money,Convertible Bond Prices,More on Convertibles,Exchangeable bonds Convertible into a set number of shares of a third companys common stock Minimum (f

15、loor) value of convertible is the greater of: Straight or “intrinsic” bond value Conversion value Conversion option value Bondholders pay for the conversion option by accepting a lower coupon rate on convertible bonds versus otherwise- identical nonconvertible bonds.,20.6 Direct Placement Compared t

16、o Public Issues,A directly placed long-term loan avoids the cost of registration with the SEC. Direct placement is likely to have more restrictive covenants. In the event of default, it is easier to “work out” a private placement.,20.7 Long-Term Syndicated Bank Loans,Large money-center banks frequen

17、tly have more demand for loans than they have supply. Small regional banks are often in the opposite situation. As a result, a lager money center bank may arrange a loan with a firm or country and then sell portions of the loan to a syndicate of other banks. A syndicated loan may be publicly traded. Syndicated loans are always rated investment grade. However, a leve