第二十章长期负债

第二十章长期负债20.1LongTermDebt:AReviewCorporatedebtcanbeshort-term(maturitylessthanoneyear)orlong-term.Differentfromcommonstock:Creditor’sclaimoncorporationisspecifiedPromisedcashflowsMostarecallableOverhalfofoutstandingbondsareownedbylifeinsurancecompanies&pensionfundsPlainvanillabondsto“kitchensink”bondsFeaturesofaTypicalBondTheindentureusuallylistsAmountofIssue,DateofIssue,MaturityDenomination(Parvalue)AnnualCoupon,DatesofCouponPaymentsSecuritySinkingFundsCallProvisionsCovenantsFeaturesthatmaychangeovertimeRatingYield-to-MaturityMarketpriceFeaturesofaHypotheticalBond20.2ThePublicIssueofBondsThegeneralprocedureissimilartotheissuanceofstock,asdescribedinthepreviouschapter.Indenturesandcovenantsarenotrelevanttostockissuance.Theindentureisawrittenagreementbetweentheborrowerandatrustcompany.TheindentureusuallylistsAmountofIssue,DateofIssue,MaturityDenomination(Parvalue)AnnualCoupon,DatesofCouponPaymentsSecuritySinkingFundsCallProvisionsCovenantsPrincipalRepaymentTermbondsversusserialbondsSinkingfunds--howdotheywork?FractionalrepaymenteachyearGoodnews--securityBadnews--unfavorablecallsHowtrusteeredeemsProtectiveCovenantsAgreementstoprotectbondholdersNegativecovenant:Thoushaltnot:paydividendsbeyondspecifiedamountsellmoreseniordebt&amountofnewdebtislimitedrefundexistingbondissuewithnewbondspayinglowerinterestratebuyanothercompany’sbondsPositivecovenant:Thoushalt:useproceedsfromsaleofassetsforotherassetsallowredemptionineventofmergerorspinoffmaintaingoodconditionofassetsprovideauditedfinancialinformationTheSinkingFundTherearemanydifferentkindsofsinking-fundarrangements:Moststartbetween5and10yearsafterinitialissuance.Someestablishequalpaymentsoverthelifeofthebond.Mosthigh-qualitybondissuesestablishpaymentstothesinkingfundthatarenotsufficienttoredeemtheentireissue.Sinkingfunsprovideextraprotectiontobondholders.Sinkingfunsprovidethefirmwithanoption.20.3BondRefundingReplacingallorpartofabondissueiscalledrefunding.Bondrefundingraisestwoquestions:Shouldfirmsissuecallablebonds?Giventhatcallablebondshavebeenissued,whenshouldthebondsbecalled?CallableBondsversusNoncallableBondsMostbondsarecallable;somesensiblereasonsforcallprovisionsinclude:taxes,managerialflexibilityandthefactthatcallablebondshavelessinterestraterisk.20.4BondRatingsWhatisrated:Thelikelihoodthatthefirmwilldefault.Theprotectionaffordedbytheloancontractintheeventofdefault.Whopaysforratings:Firmspaytohavetheirbondsrated.Theratingsareconstructedfromthefinancialstatementssuppliedbythefirm.Ratingscanchange.Raterscandisagree.BondRatings:InvestmentGradeBondRatings:BelowInvestmentGradeJunkbondsAnythinglessthananS&P“BB”oraMoody’s“Ba”isajunkbond.Apoliteeuphemismforjunkishigh-yieldbond.Therearetwotypesofjunkbonds:Originalissuejunk—possiblynotratedFallenangels—ratedCurrentstatusofjunkbondmarketPrivateplacementYieldpremiumsversusdefaultrisk20.5DifferentTypesofBondsCallableBondsPuttableBondsConvertibleBondsDeepDiscountBondsIncomeBondsFloating-RateBondsPuttablebondsPutprovisionsPutpricePutdatePutdefermentExtendiblebondsValueoftheputfeatureCostoftheputfeatureConvertibleBondsWhyaretheyissued?Whyaretheypurchased?Conversionratio:NumberofsharesofstockacquiredbyconversionConversionprice:Bondparvalue/ConversionratioConversionvalue:PricepershareofstockxConversionratioIn-the-moneyversusout-the-moneyConvertibleBondPricesExampleofaConvertibleBondMoreonConvertiblesExchangeablebondsConvertibleintoasetnumberofsharesofathirdcompany’scommonstock.Minimum(floor)valueofconvertibleisthegreaterof:Straightor“intrinsic”bondvalueConversionvalueConversionoptionvalueBondholderspayfortheconversionoptionbyacceptingalowercouponrateonconvertiblebondsversusotherwise-identicalnonconvertiblebonds.ExampleofanExchangeableBond20.6DirectPlacementComparedtoPublicIssuesAdirectlong-termloanavoidsthecostofregistrationwiththeSEC.Directplacementislikelytohavemorerestrictivecovenants.Intheeventofdefault,itiseasierto“workout”aprivateplacement.20.7Long-TermSyndicatedBankLoans20.8SummaryandConclusionsThedetailsofthelong-termdebtcontractarecontainedintheindenture.Themainprovisionsare:security,repayment,protectivecovenantsandcallprovisions.Protectivecovenantsaredesignedtoprotectbondholdersfrommanagementd