Corporate Debt Instruments
Chapter 7
Corporate Bonds
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classified by type of issuer
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public utilities
transportations
banks/finance
industrials
Features
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indentures
term bonds
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notes
bonds
serial bonds
Corporate Bonds
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Features
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security
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private placement
provisions
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collateral
debenture bonds
guaranteed bonds
callable
refunding
sinking fund
ratings
Moody's S&P
Fitch
Brief Definition
Investment Grade: High Credit Worthiness
Aaa
AAA
AAA
Gilt edge, prime, maximum safety
Aa1
AA+
AA+
Aa2
AA
AA
Very high grade, high quality
Aa3
AA–
AA–
A1
A+
A+
A2
A
A
Upper medium grade
A3
A–
A–
Baa1
BBB+
BBB+
Baa2
BBB
BBB
Lower medium grade
Baa3
BBB2
BBB2
Distinctly Speculative: Low Creditworthiness
Ba1
BB+
BB+
Ba2
BB
BB
Low grade, speculative
Ba3
BB–
BB–
B1
B+
B+
B2
B
B
Highly speculative
B3
B–
B–2
Predominantly Speculative: Substantial Risk or in Default
CCC+
Caa
CCC
CCC
Substantial risk, in poor standing
CCC–
Ca
CC
CC
May be in default, extremely speculative
C
C
C
Even more speculative than those above
CI
CI = Income bonds; no interest is being paid
DDD
Default
DD
D
D
High Yield Bonds
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original issue high yield bonds
downgraded to high yield
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fallen angels
issues in which issuers have significantly
increased debt load for LBO or recap.
deferred coupon structure
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deferred interest bonds
step up bonds
payment in kind bonds
Medium-Term Notes
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notes offered continuously to investors by
agent of issuer
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variety of maturities
shelf registration
primary market
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best-efforts basis
small amts on intermittent basis
agents – 2 to 4 IB firms
rate schedule as spread over Treasuries
Commercial Paper
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ST unsecured note issued in open market
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short term funding for seasonal and working capital needs
maturities range from 1 to 270 days
rollover risk
ratings
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investment vs. noninvestment grade
LOC paper
directly placed vs. dealer placed paper
Tier 1 and Tier 2 paper
sold at discount to par