Debt Management A Practitioner's Guide

by Finnerty, John D.; Emery, Douglas R.

• ISBN13: 9780875846170
• ISBN10: 0875846173
• Format: Hardcover
• Copyright: 2001-06-15
• Publisher: Oxford University Press

Summary

When companies need fuel to grow, bonds may be the way to go. Traditional blue-chip firms and dot-com startups alike can use debt strategically as a key financial instrument. The critical challenge, however, is integrating corporate debt into core business strategies and established financial policies. This practical book provides practitioners in every industry with a comprehensive, prudent approach to managing corporate debt obligations. Written by leading experts in the field and drawing from case studies of real companies, Debt Management walks financial professionals through the entire decision-making process--from designing debt issues to retiring debt through bond redemptions and bond repurchases, all to meet corporate financial objectives. Unique in its presentation of the issuer's perspective--that is, it looks at debt from the company's viewpoint, and not just the buyer's or underwriter's--this work will be the industry reference on debt management and the corporate financier's desktop consultant for years to come. With insights into how factors such as bond valuation methodologies, derivatives, and tax and regulatory restrictions affect the process, the authors provide practitioners in both the U.S. and international debt markets with the information and tools needed to make smart debt-management decisions. With first-rate thinking in finance, while keeping the complex mathematics to a minimum, this volume will prove as handy as it is indispensable--the essential reference for planning, implementing, and managing corporate debt with discretion and confidence.

Author Biography

John D. Finnerty is a Partner at PricewaterhouseCoopers in New York City and a Professor of Finance at Fordham University.

Table of Contents

Preface	p. xiii
Acknowledgments	p. xvii
Overview of Debt Management	p. 1
The Goal of Debt Management	p. 2
Debt Versus Equity	p. 3
Types of Long-Term Debt	p. 4
The U.S. Bond Market	p. 5
Other Bond Market Participants	p. 9
Obtaining Bond Information	p. 11
Trends Affecting the Bond Market	p. 12
The Role of Technology	p. 20
Commercial Debt Financing	p. 21
Trade Credit	p. 22
Short-Term Bank Debt	p. 25
Commercial Paper	p. 26
Term Loans	p. 28
Leasing	p. 32
Contracting Costs, Agency Costs, and Debt Maturity	p. 34
Private Placements	p. 35
Conclusion	p. 42
Debt Capital Markets	p. 43
Overview of the Corporate Bond Market	p. 43
Public Bond Market	p. 45
Investment Banking and the Cost of Issuing Securities	p. 49
Frequency and Timing of Borrowings	p. 55
Public Offering Versus Private Placement	p. 55
International Debt Financing	p. 58
Conclusion	p. 65
High-Yield Debt	p. 67
Market Overview	p. 67
Debt Ratings and the Risk of Default	p. 73
Historical Returns on High-Yield Debt	p. 75
Credit Analysis	p. 78
Distressed Debt	p. 83
Emerging-Market Debt	p. 84
Conclusion	p. 85
New Issue Design	p. 87
Basic Bond Features	p. 87
Bond Investors' Required Return	p. 92
Financial Contracting	p. 94
Research on Corporate Debt Provisions	p. 105
Designing a Long-Term Debt Issue: Some Practical Considerations	p. 112
Conclusion	p. 116
Institutional Considerations	p. 117
Taxation of Debt Instruments	p. 118
Taxation of Debt with Contingent Payments	p. 124
Taxation of Dividends	p. 126
General Tax Consequences of a Bond Refunding	p. 126
Accounting Considerations	p. 128
Fixed-Rate Capital Securities: Tax Deductible Equity?	p. 132
Conclusion	p. 136
Fixed-Income Derivatives	p. 137
Basic Building Blocks	p. 137
Hedging	p. 141
Relationships Among the Basic Building Blocks	p. 147
Swaptions	p. 149
Interest Rate Caps, Floors, and Collars	p. 149
More Complex Floating-Rate Notes	p. 152
Structured Products	p. 159
Conclusion	p. 162
Debt Innovations	p. 165
Sources of Value Added	p. 166
Value Added from Structuring Securities to Reduce or Reallocate Risk	p. 181
Structures for Reallocating Prepayment Risk	p. 184
Structures for Reducing or Reallocating Default Risk	p. 187
Conclusion	p. 196
Valuing Bonds and Bank Loans	p. 199
Discounted-Cash-Flow Analysis	p. 199
Measuring Bond Yield	p. 202
Valuing Floating-Rate Bonds and Bank Loans	p. 204
Drawbacks to Traditional Yield Spread Analysis	p. 207
Bonds with Embedded Options	p. 207
The Binomial Valuation Model: Preliminary Concepts	p. 210
Constructing the Binomial Interest Rate Tree	p. 214
Valuing Bonds	p. 220
Incorporating Default Risk: The Option-Adjusted Spread	p. 226
Conclusion	p. 229
Bond Refunding: Measuring the Net Advantage	p. 231
Overview of Bond Refunding	p. 232
Discounted-Cash-Flow Analysis	p. 233
Debt Service Parity	p. 234
Choice of Discount Rate	p. 235
A Single-Period Example	p. 235
General Analytical Framework	p. 237
Discounted-Cash-Flow Model	p. 239
An Example of a Bond Refunding	p. 241
A More Exact Debt Service Parity Model	p. 243
Premium Debt Swaps	p. 245
Impact of a Sinking Fund	p. 246
Exchanging Debt for Other Securities	p. 247
Conclusion	p. 249
Bond Refunding: The Timing Decision	p. 251
Break-Even Analysis	p. 252
Refunding Efficiency	p. 253
A Binomial Model for the Call-or-Wait Decision	p. 259
Synthetic Bond Call Options	p. 269
Tender Offers and Open Market Purchases	p. 270
Conclusion	p. 273
Sinking-Fund Management	p. 275
Types of Sinking Funds	p. 275
Overview of Sinking-Fund Management	p. 277
Refunding Discounted Debt	p. 279
Advance Purchases of Low-Coupon Bonds	p. 284
Impact of Accumulation	p. 285
A Binomial Model for Sinking-Fund Management	p. 286
An Example of a Sinking-Fund Analysis	p. 294
Case Study: Sinking-Fund Management at the World Bank	p. 297
Conclusion	p. 300
Other Types of Bond Refundings	p. 303
Refunding Floating-Rate Debt	p. 303
Defeasance	p. 304
Advance Refunding of Corporate Debt	p. 311
Refunding Under Rate Base Regulation	p. 319
Refunding Tax-Exempt Corporate Bonds	p. 322
Conclusion	p. 325
Preferred Stock and Preference Stock	p. 329
Main Features of Preferred Stock	p. 329
Financing with Preferred Stock	p. 331
Valuing Preferred Stock	p. 331
Preferred Stock Innovations	p. 332
Refunding Preferred Stock	p. 337
Altering Capital Structure	p. 342
Conclusion	p. 346
Convertible Securities	p. 347
Convertible Security Features	p. 347
Why Firms Issue Convertible Securities	p. 349
Valuing Convertible Bonds	p. 351
Forced Conversions	p. 353
Convertible Preferred Stock	p. 355
Convertible Securities Innovations	p. 356
An Example Using a Securities Innovation	p. 362
Conclusion	p. 366
The Future of Debt Management	p. 369
The Future of Debt Markets	p. 370
The Future of Securitization	p. 371
The Future of Securities Innovation	p. 372
The Future of Fixed-Income Derivatives and Hedging	p. 373
The Future of Innovative Corporate Finance Strategies	p. 374
The Importance of Active Debt Management	p. 374
The Future of Fixed-Income Valuation	p. 376
A Final Word	p. 377
Notes	p. 379
Suggested Additional Readings	p. 405
Index	p. 407
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