Mark Sexton and Todd Story

fit 6130 Individual Assignment (case study) Case deliver Mark sexton and Todd Story, the owners of a manufacturing conjunction have decided to expand their operations. They instructed you as their sorely hired financial psychoanalyst to enlist an investment banker to help cuckold $35 million in new 10- year vexs to finance construction. You have entered into discussion with Kim McKenzie, an insurance stiff from the unfluctuating of Raines and Warren about which stay put features your family should consider and what verifier stride the roll in the hay depart likely have.Although your Bosses ar aw be of the get features, they are not sure about the apostrophizes and benefits of somewhat features especi completelyy how they leave affect the verifier com put downe of the confiscate issues. This is more so that your firm is not a in public traded company. You have been asked to prepare a memo on the effect of each of the quest link features on the voucher roll of the confiscate. It is expected that you allow emphasis on their perceived benefits. The impound issuer/the borrower/the bosses Mark Sexton and Todd Story Bond nurse $35 million Bond maturity 10 years Financing purpose constructionHired underwriter Kim McKenzie (Raines and Warren) .Case Studied Memos 1. The auspices of the bandage- that is, whether the stay put has a indirect. Secured bond is with confirmative, whereby the issuer pledged specific pluss in case of bankruptcy or un qualified to pay debt. A bond with collateral will have a unhorse coupon rate ( stakes/return) and reject the aegiss lay on the line only with high credit ratings, which less likely it is to default. further the issuer need to ensure that the collateral is in good working order and posteriornot be sold until the bond is matured.Considering bond with collateral is secured investment to investors, during default, the investors whitethorn receive all or part of the collateral in the rank of debt un salaried. Collateralized bond is alike salable to the secondary commercialise 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 surpass to put clear guideline of what physique of asset eligible to be put as collateral and define authoritative rule of how the assets value can be sum up to secure the bond maturity stage. 2.The seniority of the bond In case of resolution or bankruptcy, senior bond has high priority to be give jump compared to some another(prenominal) bond that is considered next-to-last or the subordinated bonds. Senior bond gets full defrayment in bankruptcy which its stipulation may restrict the borrower from issuing any next bonds senior to the current bonds. A junior bonds security ranks disappoint than other bond securities in love to the owners claims on assets and income if the issuer becomes insolvent. Bond holders of secured debt (with collateral) essential be paid before the holders of unsecured debt.Bondholders of unsecured debt must be paid before like shareholders, and finally, preferred shareholders must be quelled before common shareholders. In general, a junior security entails prominenter risk but shooters higher potential yields than securities with greater seniority. To be more appealing to investors, the bondholders should jut senior bond in able to offer lower coupon. 3. The armorial bearing of a drop down line of descent Bond drop down storeho go for is a restricted asset where the issuer is required to set aside cash for redeeming back or buying back some of its bond account payable by deposited money with an independent trustee.Sinking fund is a partial guarantee to bondholders that will reduce the coupon rate. By having sinking feeling fund, it allows the issuer to repay specific bonds value at a trustworthy period or retire a portion of the bond every ye ar until its matured. Its a great program but the issuer must be able to generate cash flows to inclose the interim pays 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 accord bond with lower beguile pass judgment.With the sinking fund, it will also gain benefits by dint of taxation and enjoy capital gain. It also secured a good management of long debt in advance. 4. A visit cooking with specified jaw dates and speak prices Adding training to a bond with specific press date and prices will benefit the bond issuer more than the bondholder but it will definitely make up the coupon rate. Able to salvation bonds before maturity (or at a specified date according to preparation) is called callable bond (or redeemable bond) at a special price (not obligated).Any future payment to the bondholder is immediately and indefinitely cancelled forme rly the bond is called. Re duty a bond with lower the debt and is hence liberated from paying amuse on the called bond. Normally, the bond is called because the issuer no continuing needs to borrow the money, or because pursuit rates have fallen and the issuer insufficiency to issue new bonds at a lower engagement rate. In security purpose of long-term benefit with changeful financial forecast, it is not applicable to issue call prep. 5. A deferred call incidental the call provisionA bond with call provision accompanied by a deferred call will actually prohibited from calling the bond before a true date. It is call protected or period of Call Protection during the period of cadence which the bond may not be prematurely redeem. 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 principal to the bondholder and ceased the coupon rate. The call provision accompan ied by deferred call in a bond is to protect the bondholder from the falling of interest group rates before the call date.A deferred callable bond may demand a more or less higher coupon rate compared to a mean(prenominal) bond due to its callable feature as investors are undefendable to the reinvestment risk assuming that the prevailing interest rates then is lower than the coupon paid by our bond on the callable date. 6. A make- intact call provision A bond with a make whole call (provision) allowing the issuer to pay off remaining debt early by fashioning lump sump payment establish on NPV (net present 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 be in the indenture. N ormally, 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 significant, much(prenominal) provisions are rarely invoked.Hence, it is recommended that the bond issuance should not have a make-whole call provision. 7. Any validatory bargains. demonstrate any everyplaceall positive covenants that your firm may consider. The presences of positive covenants (also called as affirmative covenant) protect bondholders by forcing the company to attempt actions that benefit bondholders. A positive covenant would reduce the coupon rate but will enlarge the trust of bondholders. For instance, it requires the issuer to backrest the principal of the bond enough unstable assets must be maintained.More commonly, a positive covenant requires the issuer to have a reliable amount of insurance or submit to periodic audits. 8. Any electronegative covenants. deal any overall negative c ovenants 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 from actions by the company that would suffering 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 passage feature The passage feature is a financial derivative instrument that is set separately from the underlying security. Therefore, an embedded modulation feature adds to the overall value of the security. The rebirth 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 sell equity at a discounted price. standardized 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 bondholder will exercise the option when the total value of the shares received from conversion exceeds the bonds worth. 10. A aimless rate coupon Floating rate coupon is a bond with move coupon payments that are adjusted at specific intervals.It is all known as a variant 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 outlined 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 outlet of this, the coupon payments can change over time. A floating rate coupon or variable rate bonds market values fluctuat e less than other bonds.