Sourcing of Debt

1
Sourcing of Debt

• Chapter Thirteen
• Eiteman, Stonehill, Moffett

2
Maturity matching

• fixed assets financed by
• long-term debt
• equity
• current assets financed by
• short-term debt
• long-term debt

3
Current assets

• Cash
• seasonality
• Marketable securities
• Accounts receivable
• seasonality
• Inventories
• seasonality
• safety stocks

4
Current assets
Value
Current Assets
Cash
Inventories
Receivables
J
O
A
J
J
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

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

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

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

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)

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

11
Euro-notes - investor purchased

• non-underwritten - types
• euro-commercial paper (ECPs)
• euro-medium-term notes (EMTNs
• non-underwritten - characteristics
• discount bills

12
Euro-bonds

• fixed-rate issues
• floating rate note
• semi-annual coupon
• some are perpetuities
• equity related issues