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Chapter 20

Chapter 20. MARKETS FOR CORPORATE SENIOR INSTRUMENTS: I. Corporate Debt Market. Commercial Paper Market Medium-Term Note Market Euronote Market Bank Loan Market Bond Market. Credit Risk. Default Risk Risk that issuer will default on its obligation to the lender. Credit Spread Risk

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Chapter 20

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  1. Chapter 20 MARKETS FOR CORPORATE SENIOR INSTRUMENTS: I

  2. Corporate Debt Market • Commercial Paper Market • Medium-Term Note Market • Euronote Market • Bank Loan Market • Bond Market

  3. Credit Risk • Default Risk • Risk that issuer will default on its obligation to the lender. • Credit Spread Risk • Risk that debt obligation will decline due to an increase in the credit spread. • Downgrade Risk • Risk that credit quality of issuer declines.

  4. Commercial Paper • Short-term unsecured promissory note issued in the open market • Characteristics • Used for bridge financing • Maturity of less than 90 days • Rolled over at maturity • Backed by unused bank credit lines • Limited secondary market activity

  5. Issuers of Commercial Paper • Large corporations with strong credit quality • Financial Companies • captive finance companies • bank-related finance companies • independent finance companies • Nonfinancial Companies • domestic and foreign corporations

  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

  7. Non-U.S. Commercial Paper Market • Eurocommercial Paper • issued and placed outside the country in whose currency it is denominated • Differences between U.S. and Euro-CPs • Maturity • Bank credit lines • Placement • Dealer participation • Secondary market

  8. Medium-Term Notes (MTN) • Corporate debt obligations offered on a continuous basis • Characteristics • offered continuously to investors • rated by rating agencies • maturities range from 9 months to 30 years • registered with the SEC • Typically issued by non-financial corporations

  9. The Primary Market of MTNs • Placement and Distribution • sold on a best-efforts basis by an investment banker • sold in small amounts

  10. Structured MTNs • Combine offering with positions in derivative markets to create debt obligations with more interesting risk/return features. • Types: • inverse floating-rate security • structured note

  11. Bank Loans • Domestic bank • Subsidiary of foreign bank • Foreign bank • Subsidiary of domestic bank • Offshore or Eurobank

  12. Syndicated Bank Loans • A group of banks provides funds to the borrower. • Senior bank loans • marketable • collateralized • based on LIBOR

  13. Lease Financing • Parties involved: • lessee • lessor • Leasing arrangements • leveraged lease • tax-oriented lease • single-investor of direct lease

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