Encyclopedia of Debt Finance 2nd Edition by Tony Rhodes ISBN 1843748878 978-1843748878
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ISBN 10: 1843748878
ISBN 13: 978-1843748878
Author: Tony Rhodes
Since the first edition of the book was published, there has been a global financial crisis, but despite the significant events, the instruments that have provided the foundation of debt markets over the years have remained essentially the same. However, what has changed is the conditions attached to them and the capital required to support them. Borrowers are more flexible on the terms of their financings and a wider variety of investors is now sought. Investors now are prepared to accept a greater variety of risks and instruments. This book is an up-to-date, comprehensive description of these state-of-the-art debt instruments, explaining the nature of the instrument and providing some examples of how they can be applied to commercial situations. Practitioners will need to have a good understanding of the short-term markets such as commercial paper, medium term highly flexible loan markets, the long-terms US private placement market, medium-term note and bond markets, the covered bond
Table of contents:
Part 1 – Core products
1
Commercial paper and medium-term notes
Andrew Ellis, Goldman Sachs
Introduction: what is commercial paper?
Who issues commercial paper?
Why use the commercial paper markets?
Who buys commercial paper?
Trading and pricing
Ratings requirements
Additional issuer support
Documentation, disclosure and regulation
Medium-term notes
What are they – their relevance – and why use them?
Issuer profiles – investor profiles – leading players
Sample termsheet – secondary market, trading, investors -methodology for pricing – distribution methods
Documentation, tax and accounting issues – listing requirements reporting requirements
Pros and cons
The syndicated loan market
2
Sean Malone and Christoph Weaver, The Royal Bank of Scotland
Introduction
Background
Loan market overview
EMEA region
Syndicated loan segments
General corporate
Acquisition finance
Other structured finance
Syndicated loan process
Mandate phase
Syndication phase
Post-closing phase
Summary
US private placements
Michael Thilmany, HSBC
What is a private placement?
Characteristics of a private placement issue
Business
Geographic diversity
Structure
Credit profile
National Association of Insurance Commissioners
Types of securities
Issue size
Maturity and amortisation
Interest rate
Currency
Callability and refundability
Covenants
Private placement process
The market for private placements
Summary analysis
4
Debt capital markets
Andrew Menzies and Naveen Rathour, Société Générale
Introduction to bonds
Form
Issuers of bond debt
Use of proceeds
Financing of budget deficits
Acquisition financing
Project financing
Increasing capital
Rebalancing capital structure
Refinancing maturing debt
Timing and cost of carry
Bond investors
Global bond markets
Documentation
3
Flexibility
Cost
Time
Sample termsheet
Accounting
Pricing
Yield spread
I-spread
Z-spread
Asset swap spread
Credit default swap spread
Distribution methods
Sovereign issuers
Financial institutions and corporates
Tapping
Investor roadshows
Secondary markets
Covered bonds
Heiko Langer, BNP Paribas
Introduction: what is a covered bond?
Bankruptcy event
Issuers of covered bonds
Structural subordination
Type of collateral assets
Public sector debt
Mortgage loans
Mortgage valuation
Substitute collateral
Asset-liability matching
Derivatives in the cover pool
Cover monitor
Rating covered bonds
Risk weighting
Standardised approach
Internal ratings-based approach
Covered bonds during the financial crisis
Difference between covered bonds and MBS
6
Convertible bonds
Jan De Spiegeleer, Jabre Capital Partners and Wim Schoutens,
Catholic University of Leuven
Introduction
5
Hybrid instrument
Parity and bond floor
Delta of a convertible bond
Yield measures
Current yield
Yield to maturity
Basic features
Issuer call
Issuer put
Mandatory
Coupons
Advanced features
Exchangeable
Resets
Contingent conversion
Makewhole
Accretion
Dividend entitlement
Dividend protection
Conversion ratio adjustment
Dividend pass-thru
Cross-currency convertible
Convertible bond market
Investors
Convertible bond arbitrageurs
Issuers
New issuance
Equity exposure of convertible bond
Example
Convexity of a convertible bond
Profile of a convertible
Distressed debt
Out-of-the-money
At-the-money or ‘balanced’
In-the-money
Valuation
Introduction
Stochastic process
One factor model
Two factor model
Multi-factor models
One-and-a-half factor models
Numerical techniques
Lattice models
Finite differences
American Monte Carlo
Jump-diffusion example
Introduction
Example
Optional conversion
No conversion
Put
Risk management
Equity risk
Credit risk
Volatility risk
Liquidity risk
Merger and acquisition risk
Change of control put
Change of conversion ratio
Conclusion
Further reading
7
Contingent convertibles: introduction to a new asset class
Jan De Spiegeleer, Jabre Capital Partners and Monika B. Foryś and Wim Schoutens, Catholic University of Leuven
Introduction
Definition
What is a CoCo?
Risk profile
CoCo-like products
CoCos in the market
Anatomy of a CoCo
Trigger event
Market-based trigger
Accounting trigger
Regulatory trigger
Multi-variate trigger
Conversion type
Conversion into shares
Debt write down
Conversion price
Pricing techniques
Credit derivatives approach
Pricing example
Case study: Lloyds
Equity derivatives approach
Step 1: zero coupon CoCo
Step 2: adding coupons
CoCo dynamics
Conclusion
Development finance for the private sector
Simon Jackson, African Development Bank
Private sector financing in MDBs
Origins
Investment criteria
Preferred creditor status
A/B-loan co-financing
Eligible B-loan investors
B-loan terms and conditions
MBD/DFI syndication
Islamic finance: where is the market going?
David Roberts, Eiger Trading Advisers
Introduction
Principles of Islamic financing and riba
Islamic financing structures
Islamic financing: market size
Sukuk issuance
A new economic crisis?
Arrangers and bookrunners
Industry breakdown
Islamic banks in London
So where will the market be in five years?
10
X
Credit ratings
Alex Griffiths, Fitch Ratings
Introduction
What are credit ratings?
The rating process
Monitoring ratings
Input from rated entities
Corporate finance ratings
Non-financial corporate ratings
Qualitative inputs
Quantative inputs
Bank and other financial institutions ratings
Insurance ratings
Sovereign and public finance ratings
Quantitative inputs
Qualitative inputs
Cont
Peer comparisons
Structured finance ratings
Infrastructure and project finance ratings
Part 2 – Applications
11
Commercial paper issuance
Andrew Ellis, Goldman Sachs
A changing backdrop
The product revisited
Recent developments – STEP
Evolution of market outstandings
Current and future challenges
Market access – general preconditions
Issuance trends
Pricing dynamics
12
Conclusions
Syndicated loans – acquisition finance
Rebecca Manuel, The Royal Bank of Scotland
Introduction
Background
Case studies
Investment grade case study – BHP Billiton
Non-investment grade case study – WorldPay
European high yield bond market – providing additional liquidity for
acquisition financing
Introduction to structural differences
What is next?
Case study: Liberty Global acquisition of Unitymedia – high yield
acquisition finance
Basel III and its effect on the loan market
Basel III
Final Basel definition
Regulatory updates – key items
Minimum capital standards
Liquidity coverage ratio
Net stable funding ratio
Leverage ratio
Outlook and summary
Project finance
David Gardner and James Wright, HSBC Introduction
13
Contents
What is project finance?
The project finance market (2010)
Similarities to other forms of financing
Transactional stakeholders
Schematic contractual structure for a project financing
Ownership arrangements
Input and sales arrangements
Stakeholder motivations for project financing
Sponsors
Procuring authority/government
Lenders
Project process sequence
Pre-requisites to project finance
Project risks and mitigants
Financing considerations
Sources of debt finance
Equity
Documentation and security
Project finance post the financial crisis
Summary
15
SES Global’s billion dollar private placement
Michael Thilmany, HSBC
Precursor to a private placement
Decision to approach the private market
Transaction execution
The SES roadshow
Circling and pricing
Investor due diligence
Finalisation of documentation
Successful execution
Liability management for corporate bond issuers
Vijay Raman and Julien Brune, Société Générale
Corporate & Investment Banking
Introduction to liability management
Market trends in Europe
Types of transactions
Key drivers for corporate bond issuers
Structuring LM transactions to meet the objectives
Determining features of LM transactions
Documentation
Recent European LM transactions – key features
Case study: DONG Energy corporate hybrid refinance and tender
Transaction characteristics
offer – January 2011 Background
Outcome
16
Aircraft portfolio securitisations: a decade in motion Cecilia Park, Amur Capital Management and Zarrar Sehgal, Clifford Chance, US LLP
Introduction
In the beginning
Offerings
Acquisition financing
Characteristics of securitisation transactions
Initial public offerings
Role of monolines and liquidity facilities in the revival of the
post-9/11 market
Aircraft finance players
Return to the future
17
Key considerations of covered bond issuers and covered bond investors
Heiko Langer, BNP Paribas
Introduction
The issuer’s perspective
Funding advantage
Available collateral
Alternative use of collateral
Expansion of investor base
Lengthening of maturity profile
Excessive use of covered bonds
The investor’s perspective
Relative cost
Issuer risk
Cover pool risk
Cover pool transparency
Covered bond framework
Asset eligibility criteria
Matching requirements
Post-bankruptcy procedures
Sovereign risk
Regulatory treatment
Risk weighting
Investment limits
Basel III-liquidity coverage ratio
Solvency 2
Rating dependency
Bail-in
Conclusion
18
Pulkovo Airport Project, St Petersburg, Russia
Lorenz Jorgensen, EBRD
Background
Key facts and considerations
Project impact
Lessons for success
Conclusions
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