Mark Sexton and Todd Story

FIN 6130 Individual appellation ( grounds study) Case Study chicken feed Sexton and Todd Story, the owners of a manufacturing company discombobulate decided to expand their operations. They instructed you as their newly hired financial analyst to enlist an underwriter to help sell $35 million in new 10-year wedges to finance construction. You have entered into discussion with Kim McKenzie, an underwriter from the slopped of Raines and rabbit warren about which cohere touts your company should consider and what verifier regulate the cater go forth likely have.Although your Bosses be aw atomic number 18 of the amaze owns, they are not sure about the costs and benefits of some features e finickyly how they go away bear on the coupon yard of the adhesiveness completes. This is more 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 hold features on the coupon roll of the stick. It is exp ected that you will emphasis on their perceived benefits. The draw issuer/the take overer/the bosses Mark Sexton and Todd Story bail foster $35 million Bond maturity 10 years Financing purpose constructionHired underwriter Kim McKenzie (Raines and Warren) .Case ceasevas Memos 1. The hostage of the bond- that is, whether the bond has a collateral. Secured bond is with collateral, whereby the issuer pledged specific additions in case of bankruptcy or unable to pay debt. A bond with collateral will have a lower coupon gait ( concern/return) and lower the aegiss risk just with high conviction ratings, which less likely it is to default. But the issuer need to ensure that the collateral is in good working order and cannot be sold until the bond is matured.Considering bond with collateral is secured investment to investors, during default, the investors whitethorn receive all or transgress of the collateral in the mensu run of debt unpaid. Collateralized bond is as well as m arketable to the lower-ranking market especially if it is a non-publicly traded or listed company recognized among investors. In term of outlining the specific security of collateral attached to a bond, its best to put clear guideline of what sort of asset worthy to be put as collateral and define veritable bump of how the assets value can be sum up to secure the bond maturity block. 2.The higher-rankingity of the bond In case of liquidation or bankruptcy, senior bond has higher priority to be paid first compared to another bond that is considered junior or the subordinated bonds. superior bond gets full payment in bankruptcy which its covenant may restrict the borrower from issuing any future bonds senior to the reliable 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 sooner the holders of unsecured debt.Bond holders of unsecured debt must be paid before favored shareholders, and finally, preferred shareholders must be satisfied before common shareholders. In general, a junior security entails greater risk but offers higher potential 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 bearing of a drop feeling fund Bond drop down fund is a restricted asset where the issuer is required to set aside money for redeeming grit or buying back some of its bond payable by deposited money with an independent trustee.Sinking fund is a partial guarantee to bondholders that will strangle the coupon gait. By having sinking fund, it allows the issuer to repay specific bonds value at a certain period or retire a portion of the bond every year until its matured. Its a great program but the issuer must be able to generate cash flows to kick in the interim payments into a sinking fund or else, 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 rates.With the sinking fund, it will also gain benefits through taxation and enjoy nifty gain. It also secured a good management of long-term debt in advance. 4. A blazon out provision with specified conjure date stamps and gossip 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 increase the coupon rate. adapted to repurchase bonds before maturity (or at a specified date according to provision) is called callable bond (or redeemable bond) at a special price (not obligated).Any future payment to the bondholder is immediately and indefinitely cancelled at a time the bond is called. Recalling a bond with lower the debt and is hence liberated from stipendiary interest on the called bond. Normally, the bond is called beca utilize 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 relevant to issue call provision. 5. A deferred call accompanying the call provisionA bond with call provision accompany 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 deliver. 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 trail 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 go of interest rates before the call date.A deferred callable bond may demand a slightly higher coupon rate compared to a prevalent bond due to its callable feature as investors are exposed to the reinvestment risk assuming that the prevailing interest rates thusly is lower than the coupon paid by our bond on the callable date. 6. A make- firm 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 gravel value) of future interest payments that will not be paid in cause of the call.This type 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 signific ant, such provisions are rarely invoked.Hence, it is recommended that the bond issuance should not have a make-whole call provision. 7. Any verifying 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 enough liquid assets must be maintained.More commonly, a positive covenant requires the issuer to have a certain amount of insurance or submit to periodic audits. 8. Any negative covenants. Discuss any overall negative covenants that your firm may consider. A negative covenant would reduce the coupon rate. Remember, the goal of a corporation is to maximize shareholder wealth. The presence of negative covenants protects bondholders fr om actions by the company 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 restriction of the issuers actions. 9. A conversion feature The conversion feature is a financial derivative instrument that is determine 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 equity at a discounted price. Convertible bond is an example of an asset that can undergo conversion. It gives the bondholder the option to exchange the bond for an amount (predetermined) of the bond issuers equity. Typically, the bondhol der 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 modify at specific intervals.It is all known as a protean 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 outline 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 get out of this, the coupon payments can change over time. A floating rate coupon or variable rate bonds market values hesitate less than other bonds.