Why A Corporation May Consider Convertible Bond Issuance

The company’s leverage ratio is 28% - 72% of its assets are financed by common equity and the company was profitable in the last reporting period. The company should easily raise additional funds from creditors and a convertible debenture will be an appealing venture for creditors who would want to purchase stocks of the company in the future.

Convertibles are appealing to investors who are looking for an investment with greater growth potential than that offered by a traditional bond. By purchasing a convertible bond, the investor can still receive

o Cost of debt in this case is 12.5% though MCI can raise $ 100 million more with this option in comparison to option (a) above. Servicing this debt would be a significant drain on the cash flow. o Please see Exhibit 3. (c) $600 million Convertible offering @ 7.625% 20 year with conversion at 54 per share o Using this option MCI can raise $ 100 million more than option (b) at 4.88% lower rate of interest. It also gives MCI an option to convert it to equity once the stock price reaches 54 (it is currently 47). Based on previous convertible offerings (As per exhibit 6 of case, 1978, 1979, 1980, 1981 and 1982), MCI has been converting it to equity within 18 months because of its high growth. As higher growth is projected for the next few years (Exhibit 9 of case), MCI is expected to convert this $600 million offering to equity, thereby reducing its leverage. o This option allows to finance its current activities and match capital inflows with expected investment outlays in the near future. It also allows MCI the option to eliminate the cash flow drain from servicing the debt once the stock price increases. o As per Exhibit 3 attached here, this offering will provide capital to meet the external financing needs for 1983.

Thibodeaux, W. (2017, April 19). Advantages & Disadvantages to Issuing Bonds in Order to Raise Capital. Retrieved from Pocket Sense: https://pocketsense.com/advantages-disadvantages-issuing-bonds-order-raise-capital-3899.html

This figure could be excessively high, as the industry average is 14.42%. It must be noted that after two years, debt holders would be entitled to convert these convertible bonds into Intel common stock. Should it be so, this would once again bring down the long term debt ratio, and increase Intel’s shareholder’s equity.

1. Briefly explain why many corporations prefer to issue callable long-term corporate bonds rather than noncallable long-term bonds.

Name given to certificates: Labels on documents conclude that the advances say they are debt, but labels alone cannot change equity to debt. This factor favors the advances treated as debt, but there is less weight to this factor because it is based on form rather than substance.

In 2006, Merrill Lynch became the lead book runner for a $5 billion convertible bond issue for MoGen, Inc. This was the single, largest convertible bond issuance in history and required a considerable amount of effort on the part of Merrill Lynch’s Equity Derivatives Group to convince MoGen’s management to choose Merrill Lynch over its competitors. The case is focused on Merrill Lynch’s choice of the conversion premium and coupon rate to propose to MoGen management. This pricing decision requires students understand the concept of valuing a convertible as the sum of a straight bond plus the conversion option. Valuing the conversion option as a call option requires the

liabilities, for example. They may also wish to swap a fixed coupon asset in order to reduce the interest rate risk associated with it or to ensure it better matches liabilities expected to be linked to market interest rates. Similarly, a borrower may issue a fixed coupon bond for demand reasons, but prefer floating liabilities. This is common, for example with financials.

The advantage to choosing a convertible bond for financing is that "they provide issuers with ‘cheap' debt and allow them to sell equity at a premium over current value". Jen, Choi, Lee (1997).

Though bonds provide such safety, their yields are very low and have little potential for capital appreciation in the long-run for both the issuer and receiver. Besides, the low interest-rate of bonds makes the return on holding cash virtually non-existent (Voya & Scotia, 2009). Convertible bonds, however, offer a middle ground between the safety of bonds and the upside potential, and risk, of stocks. For this firm seeking income, higher-yielding convertibles bonds are the right options they can explore. This allows for the downside protection of a

A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds,

That leaves selling bonds. There is plenty of mutual benefit in this arrangement because a bond is a loan from an investor instead of a bank. Like any loan, a bond contract pays interest on a fixed schedule and repays the principal to the investor at a stated time. Issuing debt (bonds) instead of equity (stocks) is referred to as leverage financing because the issuer is borrowing against its net worth (quantifiable) and not its equity (fluctuating).

31). Municipal bonds are bonds that the state or local government issues to raise funds. Corporate Bonds are issues by companies to raise funds. Equity Securities are Stock and Depository Receipts. Stock can be common or preferred. Commons stock is voting shares as preferred stock has no voting rights. Depository Receipts are like stock but are for ownership of foreign companies.

There are various types of debts which companies consider to finance its projects and operations. These may be secured or insecure debts, further categorised into public and private debts. A basic loan is the simplest form of debt. Some of the debts are named as following