Chapter 20
MARKETS FOR
CORPORATE
SENIOR
INSTRUMENTS: I
Corporate Debt Market
Commercial Paper Market
Medium-Term Note Market
Euronote Market
Bank Loan Market
Bond Market
Credit Risk
Default Risk
Risk that issuer will default on its obligation
to the lender.
Credit Spread Risk
Risk that debt obligation will decline due to
an increase in the credit spread.
Downgrade Risk
Risk that credit quality of issuer declines.
Commercial Paper
Short-term unsecured promissory note
issued in the open market
Characteristics
Used for bridge financing
Maturity of less than 90 days
Rolled over at maturity
Backed by unused bank credit lines
Limited secondary market activity
Issuers of Commercial
Paper
Large corporations with strong credit
quality
Financial Companies
captive finance companies
bank-related finance companies
independent finance companies
Nonfinancial Companies
domestic and foreign corporations
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
Non-U.S. Commercial
Paper Market
Eurocommercial Paper
issued and placed outside the country in
whose currency it is denominated
Differences between U.S. and Euro-CPs
Maturity
Bank credit lines
Placement
Dealer participation
Secondary market
Medium-Term Notes (MTN)
Corporate debt obligations offered on a
continuous basis
Characteristics
offered continuously to investors
rated by rating agencies
maturities range from 9 months to 30 years
registered with the SEC
Typically issued by non-financial
corporations
The Primary Market of
MTNs
Placement and Distribution
sold on a best-efforts basis by an investment
banker
sold in small amounts
Structured MTNs
Combine offering with positions in
derivative markets to create debt
obligations with more interesting
risk/return features.
Types:
inverse floating-rate security
structured note
Bank Loans
Domestic bank
Subsidiary of foreign bank
Foreign bank
Subsidiary of domestic bank
Offshore or Eurobank
Syndicated Bank Loans
A group of banks provides funds to the
borrower.
Senior bank loans
marketable
collateralized
based on LIBOR
Lease Financing
Parties involved:
lessee
lessor
Leasing arrangements
leveraged lease
tax-oriented lease
single-investor of direct lease