FIN3403 LECTURE GUNTER Wednesday September 24th 2014 1 Disclaimer These notes were prepared by a student enrolled in Melody Gunter s FIN3403 Fall 2014 course and were compiled for Exam 2 These notes contain all materials discussed during lecture on September 24th 2014 and aim to serve as a partial conceptual review for strictly Exam 2 Studying these notes alone will not guarantee you a passing grade It is highly recommended you combine the review of these notes with the review of notes from other lecture dates that you may have missed in addition to extensive practice using your TI BA II Plus on calculation problems Happy studying Corporate Debt Debt part of capital structure o Remember capital structure is one of three major business decisions in which the firm determines how to raise funds through debt equity or both o Loaned to the company by lenders creditors not invested in the company like equity I e lenders have no ownership rights to the firm purely a contractual relationship An important note when a firm who has borrowed funds misses interest principal payments to the lender the lender can become extremely active in the daily operations of the firm Such terms will be outlined in legal forms and agreements o Debt can be structured in different ways o An advantage to utilizing debt in capital structure is the fact that interest payments by the firm to the lender are tax deductible incur a tax benefit If you are reading this from the preview screen purchase these notes to continue studying If you are reading this after purchase scroll down to continue studying 2 FIN3403 LECTURE GUNTER Wednesday September 24th 2014 Four Markets for Debt Syndicated Loan Market bank debt o When groups of banks come together to lend money to a firm o All governed under the same arrangement o Banks are usually the lenders in this situation however lenders in syndicated loan markets could be other financial entities such as insurance and pension companies Insurance companies get paid by policy holders in order to insure there will be funds available in case of an accident This money can be used by the insurance companies to lend out in hopes of creating more money in interest by the borrower o Loan facilities a legal document that facilitates borrowing o The term or tenor on a syndicated loan market is usually between 1 and 5 years o Three types of syndicated loan markets 1 Term loan a loan from a bank that amortizes with a specified principal and payment schedule 2 Revolving credit a loan that has a specified term but no specified principal or interest ticket items Used for liquidity purposes rather than purchases of large Allows for keeping a little to zero cash balance and being able to borrow from a bank in the short term 3 Swingline loan usually a portion of revolving credit that allows for almost instant daily borrowing The amount that can be borrowed is smaller than the amount that can be borrowed under revolving credit Also used for liquidity purposes An important note All three of these types of loans usually have a fee associated with them that must be paid in the beginning only revolving FIN3403 LECTURE GUNTER Wednesday September 24th 2014 3 credit and swingline loans have an annual fee associated with the right to borrow Securitized Loans securitization bank debt o The firm has pledges some assets as collateral for the loan o The pledged asset is usually very liquid such as accounts receivable or o Very structured and extensive record keeping of assets is required in order finished goods inventory to report information to lender o Securitized loans are more difficult to set up and take more work to maintain but there is a smaller interest rate associated with borrowing Since the lender has collateral it is less risky to lend money under a securitized loan o Shorter term usually 1 to 3 years Leasing o When you lease a car do you feel like you own it o In the long term you don t own the item that you re leasing o There are restriction of use o Even payments that are calculated very similarly to that of a term loan o There is a residual the amount for which you have the option to buy the item being leased after the term has ended The residual affects your monthly payments and thus your overall payment o Benefit to the leaser person who actually owns the item being leased and charging a leasee to use that item since the leaser legally owns the item they incur a tax benefit from depreciation expenses Depreciation is a non cash expense that incurs tax benefits Bonds this is what the book focuses on the other three forms of debt were a lecture add on by Gunter o Highly structured o Bonds are basically universal in that they have similar features across most companies o Two types of bonds o Public bonds highly regulated by the government and governed by the Securities Exchange Commission SEC Think of public bonds as being available to the public Anyone can purchase a public bond so it is assumed by the government that these lenders are less sophisticated o Private placements less regulated by the government than public bonds Lenders are assumed to be highly sophisticated and experienced Bond jargon o Registered vs Bearer Registered bonds hold a record of all bond owners whereas bearer bonds have no ownership record Bearer bonds are no longer around and cannot legally be sold 4 FIN3403 LECTURE GUNTER Wednesday September 24th 2014 Government requires a record of bond owners under registered bonds because they want to be able to track interest payments and tax that income o Secured vs Unsecured Secured are higher risk and have higher interest rates whereas unsecured are lower risk with lower interest rates General assets support these classes of bonds o Debenture unsecured long term bond usually greater than 10 years o Note unsecured shorter term bond usually less than 10 years o Senior debt holder vs Subordinated Junior debt holders Senior debt holders are the first group of lenders to take assets out of bankrupt company Subordinated debt holders are the second group of lenders to take assets out of bankrupt company Equity holders are the last to receive assets o Indenture legal document for bonds Includes coupon rate interest rate coupon payments interest payments maturity date face amount par amount principal payment at the end of maturity terms of repayment One type of repayment term is a sinking fund Part of the principal is deposited into an account prior to maturity date This is safer
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