Mark Sexton and Todd Story

FIN 6130 Individual Assignment (case study) Case Study design Sexton and Todd Story, the owners of a manufacturing comp all have decided to expand their operations. They instructed you as their newly hired monetary analyst to enlist an underwriter to help sell $35 one thousand thousand in new 10-year tie downs to finance construction. You have entered into discussion with Kim McKenzie, an underwriter from the firm of Raines and Warren about which dumbfound attributes your company should consider and what voucher come out the issue leave likely have.Although your Bosses are aware of the alinement have gots, they are non convinced(predicate) about the costs and benefits of some features especially how they will affect the coupon locate of the adherence issues. This is much so that your firm is not a publicly traded company. You have been asked to prepare a memo on the effect of each of the following bond features on the coupon rate of the bond. It is expected that you wi ll vehemence on their perceived benefits. The bond issuer/the borrower/the bosses Mark Sexton and Todd Story Bond nourish $35 million Bond maturity 10 years Financing purpose constructionHired underwriter Kim McKenzie (Raines and Warren) .Case Studied Memos 1. The security system of the bond- that is, whether the bond has a collateral. Secured bond is with collateral, whereby the issuer pledged detail as bent-grasss in case of bankruptcy or un adequate to(p) to suffer debt. A bond with collateral will have a spurn coupon rate (interest/return) and depress the securitys risk save with higher credit ratings, which less likely it is to default. But the issuer subscribe to to ensure that the collateral is in good working order and cannot be sold until the bond is matured.Considering bond with collateral is panderd investment to investors, during default, the investors may receive all or part of the collateral in the care for of debt unpaid. Collateralized bond is also marketa ble to the secondary market especially if it is a non-publicly traded or listed company recognise among investors. In term of outlining the specific security of collateral attached to a bond, its best to effect clear guideline of what sort of asset eligible to be put as collateral and restrict certain rule of how the assets value can be sum up to secure the bond maturity period. 2.The seniority of the bond In case of liquidation or bankruptcy, senior bond has higher priority to be paid first compared to anformer(a) bond that is considered junior or the subordinated bonds. fourth-year bond gets full payment in bankruptcy which its covenant may restrict the borrower from issuing any future bonds senior to the current bonds. A junior bonds security ranks lower than other bond securities in regard to the owners claims on assets and income if the issuer becomes insolvent. Bondholders of secured debt (with collateral) must be paid in the beginning the holders of unfastened debt.Bondh olders of unsecured debt must be paid before preferred shareholders, and finally, preferred shareholders must be satisfied before common shareholders. In general, a junior security entails greater risk but gaps higher authority yields than securities with greater seniority. To be more appealing to investors, the bondholders should propose senior bond in able to offer lower coupon. 3. The presence of a sinking fund Bond sinking fund is a certified asset where the issuer is required to set aside money for redeeming sand or buying back some of its bond payable by deposited money with an independent trustee.Sinking fund is a partial take in charge to bondholders that will nullify the coupon rate. By having sinking fund, it allows the issuer to repay specific bonds value at a certain period or retire a portion of the bond each year until its matured. Its a great program but the issuer must be able to generate cash flows to determine the interim payments into a sinking fund or els e, face default. By having the presence of a sinking fund as collateral support of a bond, it promotes financial security which will attract investors to accept bond with lower interest grade.With the sinking fund, it will also stool benefits through taxation and enjoy capital gain. It also secured a good management of long-term debt in advance. 4. A accost provision with specified shout out dates and foresee prices Adding provision to a bond with specific call date and prices will benefit the bond issuer more than the bondholder but it will definitely gain the coupon rate. Able to repurchase bonds before maturity (or at a specified date consort to provision) is called callable bond (or redeemable bond) at a special price (not obligated).Any future payment to the bondholder is promptly and indefinitely cancelled once the bond is called. Recalling a bond with lower the debt and is hence liberated from pay interest on the called bond. Normally, the bond is called because the issuer no longer needs to borrow the money, or because interest rates have fallen and the issuer want to issue new bonds at a lower interest rate. In security purpose of long-term benefit with uncertain financial forecast, it is not applicable to issue call provision. 5. A deferred call accompanying the call provisionA bond with call provision accompanied by a deferred call will actually prohibited from calling the bond before a certain date. It is call protected or Period of Call Protection during the period of time which the bond may not be prematurely redeemed. During the call protected period (the cushion period), coupon rate payments are guaranteed but not later. After the call date, the bond may be redeemed by returning headway to the bondholder and ceased the coupon rate. The call provision accompanied by deferred call in a bond is to protect the bondholder from the falling of interest rates before the call date.A deferred callable bond may demand a slightly higher coupon r ate compared to a normal bond due to its callable feature as investors are exposed to the reinvestment risk assuming that the prevailing interest rates then is lower than the coupon paid by our bond on the callable date. 6. A make-whole call provision A bond with a make whole call (provision) allowing the issuer to pay off remaining debt early by making lump sump payment based on NPV (net present value) of future interest payments that will not be paid in cause of the call.This theatrical role of call should lower the coupon rate than the normal call provision with specific dates. Bondholders will receive the market value of the bond if it is a make whole provision which then they can reinvest in another bond with same criteria. The make whole call will be defined in the indenture. Normally, an issuer doesnt expect to have to use this type of provision, but if the issuer does, investors will be compensated, or made whole. Because the cost can often be significant, such provisions a re rarely invoked.Hence, it is recommended that the bond issuance should not have a make-whole call provision. 7. Any positive covenants. Discuss any overall positive covenants that your firm may consider. The presences of positive covenants (also called as affirmative covenant) protect bondholders by forcing the company to undertake actions that benefit bondholders. A positive covenant would reduce the coupon rate but will increase the trust of bondholders. For instance, it requires the issuer to cover the principal of the bond complete liquid assets must be maintained.More commonly, a positive covenant requires the issuer to have a certain come of insurance or submit to periodic audits. 8. Any detrimental covenants. Discuss any overall negative covenants that your firm may consider. A negative covenant would reduce the coupon rate. Remember, the goal of a batch is to maximize shareholder wealth. The presence of negative covenants protects bondholders from actions by the compan y that would harm the bondholders. This says nothing about bondholders. In example, the issuer cannot increase dividends, or at least increase dividends beyond a specified level.The downside of negative covenants is the bar of the issuers actions. 9. A conversion feature The conversion feature is a financial derivative prick that is valued separately from the underlying security. Therefore, an embedded conversion feature adds to the overall value of the security. The conversion feature would permit bondholders to benefit if the company does well and also goes public. Even though the company is not public, a conversion feature would likely lower the coupon rate.The downside is that the company may be selling uprightness at a discounted price. Convertible bond is an example of an asset that can undergo conversion. It gives the bondholder the option to veer the bond for an amount ( shape) of the bond issuers equity. Typically, the bondholder will exercise the option when the total value of the shares authorized from conversion exceeds the bonds worth. 10. A floating rate coupon Floating rate coupon is a bond with floating coupon payments that are adjusted at specific intervals.It is all known as a variable rate bond which has a floating or variable rate interest, or coupon rate. The bond is payable to the bondholder upon demand following an interest rate change. The rate adjusts according to a predetermined formula outlined in the bonds prospectus or official statement. Generally, the current money market rate is what is used to set the interest rate (plus or minus a set percentage). As a result of this, the coupon payments can change over time. A floating rate coupon or variable rate bonds market values fluctuate less than other bonds.