Chapter 20
MARKETS FOR
CORPORATE
SENIOR
INSTRUMENTS: I
Corporate Debt Market
Markets in which firms can borrow:
Commercial Paper Market
Medium-Term Note Market
Euronote Market
Bank Loan Market
Bond Market (Chapter 21)
since 1980s, more borrowing directly from
markets, fewer ‘bank loans’
Credit Risk
default Risk
issuer won’t make payments on time
credit spread: premium on gilt/sovereign
credit spread risk: if premium increases, existing debt
market value falls
how assess credit risk?
big firms do in house
else (US) commercial ratings: Moody’s, S&P, Fitch
downgrade Risk
risk that credit quality of issuer declines.
Commercial Paper
short-term unsecured promissory note
(IOU) issued in the open market
bridge financing, seasonal, working
maturity reflects SEC regulations:
<270 days doesn’t require registration
< 90 days allows use as collateral with Fed
roll over: pay off with new issue
may back by unused bank credit lines
little secondary market activity
Issuers of Commercial
Paper
large firms with strong credit quality
mostly financial companies (80% in 1997)
captive finance companies (to fin. parents)
bank-related finance companies
independent finance companies
LOC paper: backed by LOC (only use bank
to back, not also to lend)
banks moving into paper to recoup
lending decline
Placement of Commercial
Paper
Direct Paper
directly placed by issuing firm to investors
Dealer-Placed Paper
requires service of an agent to sell the
issuer’s paper
best efforts underwriting (dealer doesn’t buy
the issue)
Medium-Term Notes (MTN)
maturities (9 mo- 30 yrs; 100 yrs Disney)
in ranges
issued continuously by agent:
buyer selects maturity from range
agent chooses spread to attract buyers
‘continuous’ unlike bond tranches
growth in last 20 yrs due to flexibility
typically issued by non-financial
corporations
MTNs II
rated by rating agencies
registered with the SEC
Placement and Distribution
sold on a best-efforts basis by an investment
banker
sold in small amounts
minimum purchase usually $1 – 25mn
Structured MTNs
‘structured’ = tailored
Combine offering with positions in
derivative markets to create debt
obligations with more interesting
risk/return features.
idea: spread, coupon can be functions of:
price, stock market indices; exchange rates…
often to hedge derivatives risk
20-30% of new issues
Bank Loans
‘Eurocurrency’ loans: any loan (in the US)
by an offshore bank
euroyen
eurodollar…
Syndicated Bank Loans
a group of banks provides funds to the
borrower, spreading the risk
senior bank loans: senior to bondholders
rates usually floats relative to LIBOR, prime…
fixed term, collateralized
Marketable: members can sell shares (even in
non-performing loans):
assignment: assignee becomes de facto owner
participation: participant relates to creditor & debtor
Lease Financing
usually for expensive equipment
lessor: buys equipment, leases to lessee
lessee: rents equipment
therefore, splits ownership from use rights
Leasing arrangements
leveraged lease (lessor borrows to buy) v.
direct
tax-oriented: ownership tax breaks for lessor