Lecture 2

Debt Financing

Example: Hybrid Securities

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Debt Instruments

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Types of Debt Instruments

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Bond Characteristics

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Characteristics of a Debt Contract

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Major Forms of Debt

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Bank Loans

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External Financing Patterns

Country External finance Bank Equity

Leasing

Supplier credit

Development bank Informal

China 29.93 10.17 2.41 1.63 2.41 4.63 5.93

France 30.91 6.76 5.76 4.30 7.36 1.42 1.67

Germany 54.29 16.84 23.13 0.74 0.94 8.52 4.13

Italy 77.71 49.67 6.88 1.67 5.83 1.17 4.17

Malaysia 40.62 13.81 4.76 3.48 13.81 4.05 0.71

Pakistan 43.13 29.96 5.63 1.50 2.92 1.04 2.08

Spain 39.78 23.00 0.67 8.04 4.22 2.62 1.22

Sweden 43.42 19.70 8.33 1.22 6.16 3.43 1.12

Turkey 43.98 20.41 9.68 4.85 1.42 6.21 1.17 United Kingdom 36.12 13.14 11.56 2.91 7.47 0.58 0.47

United States 47.12 21.47 3.24 6.09 6.62 6.76 2.94

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Types of Bank Loan

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Types of Loan Commitment

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Coupon Rates

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Benchmark Rates for Floating Rate Loans

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Selected Benchmark Rates October 2010 (Get updated rates from FT.Com)

Benchmark instrument UK Eurozone USA

1-month Treasury note 0.56% 0.41% 0.12%

3-month Treasury yield 0.57% 0.52% 0.11%

6-month Treasury yield 0.58% 0.57% 0.16%

2-year Treasury yield 0.62% 0.77% 0.35%

5-year Treasury yield 1.54% 1.38% 1.09%

10-year Treasury yield 2.87% 2.23% 2.37%

30-year Treasury yield 3.96% 2.90% 3.73%

Overnight interbank rate (LIBOR) 0.55% 0.36% 0.23%

Official interest rate 0.50% 1.00% 0.25%

Market rates 0.55% 0.75% 0.15%

Prime rates N/A N/A 3.25%

10-year government bond ratesb 2.87% 2.24% 2.37%

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Creditworthiness and Spreads

Discuss from actual yields from FT.Com

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Caps, Floors and Collars

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Loan Covenants

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Leases

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The Leasing Contract

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European Leasing Market (2009, €m)Country Outstanding Leases Country Outstanding Leases

Austria €24.595 Latvia €1.816Belgium €16.328 Netherlands €10.000Bulgaria €2.546 Norway €9.737Czech Republic €8.545 Poland €12.275

Denmark €12.980 Portugal €18.021Estonia €2.270 Romania €4.618Finland €8.209 Slovak Republic €3.478

France €82.623 Slovenia €3.703Germany €142.300 Spain €46.383Greece €9.386 Sweden €21.101Hungary €9.528 Switzerland €14.796Italy €128.259 UK €92.141

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Types of Lease

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Commercial Paper

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Supplier Credit

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Corporate Bonds

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Debt Covenants

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Exhibit 2.7: Negative Pledge

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Asset Covenants

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Bond Priorities

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Types of Bond based on Asset Claims in Case of Default

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Dividend Covenants

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Financing Covenants

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Financial Ratio Covenants

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Sinking Fund Covenants

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Bond Options

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Convertible Bonds

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Computing a Conversion Premium

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Computing a Conversion Premium

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Computing a Conversion Premium

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Complex Securities

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Bond Cash Flow Patterns

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Bond Cash Flow Patterns

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Bond Cash Flow Patterns

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Bond Credit Ratings

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The High Yield or Junk Bond Market

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Asset Backed Securities

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Global Asset Back Security Issues (2005 – 2010)

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Exotic Debt Securities - CDOs

http://video.foxbusiness.com/v/4154497/what-is-a-cdo/

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Why Innovate?

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Catastrophe Bonds

http://www.youtube.com/watch?v=20vzbZsdHKU

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Thank You