Chapter 06 Flashcards
2 categories into which “financial markets” are divided
- money mkts - maturities of < 1 yr
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capital mkts - maturities > 1 yr (largest)
- debt - “fixed-income” capital (bonds, term loans)
- equity - no maturity (pref/comm stock)
“state-owned enterprises” (SOE)
firm nat’nl govt. creates and owns (wholly/partially) to participate/support commercial activities on govt’s behalf; raises capital via debt securities (no stock)
- US: Freddie Mac, Fannie Mae
- Canada: Canada Post, VIA Rail Canada
- China: Sinosteel Corp
sub-sovereign bonds
bond issued by govt., below nat’nl/ central govt.
- US: issues municipal bonds (aka “munis”)
- interest paid to investors is tax exempt to the entity
- Revenue bonds: funds a special project (stadium, toll road) and is repaid via revenues generated from the project/svcs. (i.e. Term loans Tax increment financing (TIF) bonds (mortgage bonds))
Key capital mkt regulators in the US include:
- SEC
- FINRA
- MSRB (Municipal Securities Rulemaking Board)
Private mkt (or direct placement)
- securities are not underwritten but are sold to a limited group of institutional investors
- provisions: can be tailored to meet all’s needs
- typically do not require a detailed prospectus; thus, may be exempt from regist. with local authorities (i.e. SEC in US, Fin. Conduct Authority in UK)
- completed more rapidly than a public offering
Mortgage bonds
- to finance specific assets (e.g. real estate), usually pledged as collateral
- usually include substantial financial covenants or indenture agreements (protect bondholders’ interests by restricting mgmt’s actions)
Warrants
attached to bonds to increase investors’ interest in the purchase but may be traded separately from the bonds on a secondary market
Why have FIs been heavy issuers of preferred stock?
- most regulatory authorities count preferred stock as regulatory capital, helps the FI
- rating agencies like use of pref. stock.
who else likes pref. stock? companies that are young, high growth, in financial distress.
Bond call provisions
allows bond issuer to “call” (redeem) a bond/security prior to its original maturity.
- investors require higher coupon rates
- call premium usually paid when bond is called (usually set on a sliding scale; earlier = larger)
- great for issuers expecting rates to drop
Floating rate debt
investors prefer during periods of rising interest rates
- FRN provides stable market value
- matches current interest rates.
Borrowers prefer floating-rate debt when they expect future rate drops
Securitization
assets (e.g. inventory, AR) can be bundled to collateralize securities
- more liquid = more attractive, to investors
- e.g. CP and high-yield (junk) bonds
qualified institutional investors (QIIs)
(aka “qualified institutional buyers (QIBs)” in the US)
Guarantee of payment or collection
guaranteeing party (usually parent entity) guarantees to repay the loan or collect payment from the subsidiary, only when subsidiary formally defaults on the loan.
usually requires lenders initiate default proceedings on subsidiary and attempt collection efforts before
bond indenture
legal doc/contract, outlines borrower’s and creditor’s rights/obligations
- provisions (e.g. representations, warranties) - conditions that existed @ time of execution
- est. covenants (limits mgmt’s actions); may be
- negative (i.e., actions company cannot take, like double pledging collateral) or
- affirmative (i.e., actions company must take, like provide regular fin stmts, maintain certain ratios)
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Eurobonds (sometimes called External Bonds)
an int’nl bond, denominated in a ccy other than that of the country in which it is issued
- named per face ccy (e.g. Euroyen, Eurodollar)
e. g.: a Eurodollar bond, dominated in USD, issued in India, by a UK-based company.
