1. MARKETS FOR CORPORATE SENIOR INSTRUMENTS: I
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Chapter 20
MARKETS FOR CORPORATE SENIOR INSTRUMENTS: I

2. 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’

3. Credit Risk default Risk credit spread: premium on gilt/sovereign
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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.

4. 4/21/2017
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

5. 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

6. 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)

7. Medium-Term Notes (MTN)
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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

8. 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

9. 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

10. 4/21/2017
Bank Loans
‘Eurocurrency’ loans: any loan (in the US) by an offshore bank
euroyen
eurodollar…

11. 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

12. Lease Financing usually for expensive equipment Leasing arrangements
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