Sourcing of Debt Lecture notes for Chapter Thirteen Eiteman, Stonehill, & Moffett October 14, 20151Chapter 13 - debt financing

Maturity matching  fixed assets financed by long-term debt equity  current assets financed by short-term debt long-term debt October 14, 20152Chapter 13 - debt financing

Current assets  Cash seasonality  Marketable securities  Accounts receivable seasonality  Inventories seasonality safety stocks October 14, 20153Chapter 13 - debt financing

Current assets JO J AJ Value Receivables Inventories Cash Current Assets October 14, 20154Chapter 13 - debt financing

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 October 14, 20155Chapter 13 - debt financing

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 October 14, 20156Chapter 13 - debt financing

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 October 14, 20157Chapter 13 - debt financing

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 October 14, 20158Chapter 13 - debt financing

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%) October 14, 20159Chapter 13 - debt financing

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 October 14, Chapter 13 - debt financing

Euro-notes - investor purchased  non-underwritten - types euro-commercial paper (ECPs) euro-medium-term notes (EMTNs  non-underwritten - characteristics discount bills October 14, Chapter 13 - debt financing

Euro-bonds  fixed-rate issues  floating rate note semi-annual coupon some are perpetuities  equity related issues October 14, Chapter 13 - debt financing