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Sourcing of Debt

Sourcing of Debt. Lecture notes for Chapter Thirteen Eiteman, Stonehill, & Moffett. Maturity matching. fixed assets financed by long-term debt equity current assets financed by short-term debt long-term debt. Current assets. Cash seasonality Marketable securities

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Sourcing of Debt

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  1. Sourcing of Debt Lecture notes for Chapter Thirteen Eiteman, Stonehill, & Moffett Chapter 13 - debt financing

  2. Maturity matching • fixed assets financed by • long-term debt • equity • current assets financed by • short-term debt • long-term debt Chapter 13 - debt financing

  3. Current assets • Cash • seasonality • Marketable securities • Accounts receivable • seasonality • Inventories • seasonality • safety stocks Chapter 13 - debt financing

  4. Current assets Value Current Assets Cash Inventories Receivables J O A J J Chapter 13 - debt financing

  5. Currency matching • translation exposure • matching currency denominating assets and liabilities • transaction exposure • matching currency denominating short-term cash flows • operating exposure • matching currency denominating long-term cash flows Chapter 13 - debt financing

  6. Exposure - foreign denominated debt • transaction exposure on interest payments • short-term fluctuation in exchange rates • operating exposure on interest payments • long-term depreciation of ‘real’ exchange rates • violation of PPP • effective interest rate increases • operating exposure on principal repayment • long-term depreciation of ‘real’ exchange rate • principal increases Chapter 13 - debt financing

  7. Euro-dollar instruments • characteristics • large unsecured amounts • large corporations or governments • narrow spreads • loan rates lower • wholesale market, low overhead • deposit rates higher • no reserve rqmts, no deposit insurance • syndication spreads risk Chapter 13 - debt financing

  8. Euro-dollar credits • loans denominated in currency other than the domestic currency • Canadian banks lending in US dollars • German banks lending in Canadian dollars • interest rate tied to LIBOR (London interbank offered rate) • premium plus LIBOR • lent short and medium term • fixed term Chapter 13 - debt financing

  9. Euro-dollar credits - bank purchased • line of credit • negotiated maximum • market rate at time of access • bank has option to terminate • revolving loan • contracts for medium term 3-5 years • supplies notes which are rolled over • market rate at time of access • charge on unused slack (0.5%) Chapter 13 - debt financing

  10. Euro-notes - investor purchased • underwritten - types • revolving underwriting facilities (RUFs) • note issuance facilities (NIFs) • standby note issuance facilities (SNIFs) • underwritten - characteristics • underwritten typically by banks • hold a small position • retain management contract • securitizing eurocredits • make revenues from underwriting & placing Chapter 13 - debt financing

  11. Euro-notes - investor purchased • non-underwritten - types • euro-commercial paper (ECPs) • euro-medium-term notes (EMTNs • non-underwritten - characteristics • discount bills Chapter 13 - debt financing

  12. Euro-bonds • fixed-rate issues • floating rate note • semi-annual coupon • some are perpetuities • equity related issues Chapter 13 - debt financing

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