chapter 21 – corporate debt ii
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Chapter 21 – Corporate Debt II. Typical or Standard Bond Interest paid as you go Principal paid at maturity date Yield determined by the market which views Default Potential (Risk of Bond) Inflation (Real Rate Necessary) Bond Features (Call Options, Collateral, etc.) - PowerPoint PPT PresentationTRANSCRIPT
Chapter 21 – Corporate Debt II
Typical or Standard Bond Interest paid as you go Principal paid at maturity date Yield determined by the market which views
Default Potential (Risk of Bond) Inflation (Real Rate Necessary) Bond Features (Call Options, Collateral, etc.)
Ratings by Agencies help assess the information for market yields
Table 21-1
Chapter 21 – Corporate Debt II
What do the ratings mean? Investment Grade BBB and above Distinctly Speculative B to BB Predominately Speculative Below B
“junk bonds” “high-yield bonds”
Bonds in Default, D Have missed payment on interest Bond Trustee “filed” on missed payment
Fallen Angels
Chapter 21 – Corporate Debt II
A Look at the High-Yield Bonds Participants (Investment Bankers)
Drexel, Burnham, & Lambert (Michael Milken) Merrill Lynch, Morgan Stanely, and First Boston
Firms John Kluge and Metromedia – 1984 Kolberg, Kravis, Roberts & Co. and Beatrice –
1986 A new market for attracting capital (replacing
bank loans)
Chapter 21 – Corporate Debt II
Leverage Buy-Out (LBO) Using a firms own borrowing capacity to pay
for outside management team’s purchase of firm
Uses Deferred Interest Bonds Step-up Bonds Payment-in-kind Bonds
Management Buy-Out (MBO)
Chapter 21 – Corporate Debt II
Bond Features Call Option – right of the company to buy back
the bond for a pre set price Put Option – right of the bondholder to sell
back the bond for a pre set price Conversion feature – right of the bondholder to
convert the bond into equity shares Warrants Attached – an additional financial
asset that grants the right to buy equity Zero-Coupon Bond – pure discount bond Floating Rate Bond – coupon rate changes
Chapter 21 – Corporate Debt II
Secondary Market for Bonds Exchange Market (NYSE) – small volume OTC
Market used by institutional investors and professional money managers
Brokers search Dealers (Dealer Market) Trading Desks – Bond Pits in investment banks
The Technology Changes Moving to Web Sites that have prices Remove the extended search process
Chapter 21 – Corporate Debt II
Other Information Eurobonds
Issued outside of country of company Many different features
Preferred Stock Dividends preferred (guaranteed?) Convertible to Common in some cases Adjustable rate (floating rate)
Financial Engineering of bonds and preferred stock to meet the market demands
Chapter 21 – Corporate Debt II
Bankruptcy The Bankruptcy Reform Act of 1978
Rules for liquidation or reorganization Safe Harbor – Time to Think
Chapter 7 – Liquidation Company sells off remaining assets Pays creditors on a priority basis
Chapter 11 – Reorganization Plan approved by Court Plan approved by Claimants via Class