1CORPORATE FINANCE Table of Contents Memorandum.............................................................................................................................2 Reference....................................................................................................................................5
2CORPORATE FINANCE Memorandum To-Board of Directors From- Cc- Date-February 17, 2019 Subject-Financing Expansion Plans of Tuxedo Air with Bond Issue This memo is prepared with the intention of analyzing the different possible expansion plans for financing Tuxedo Air with the help of issuing bond. The presentation of this memo would be beneficial for owners of Tuxedo Air for understanding costs and benefit associated with different financing options. The bond is considered to be debt security, in which issuer owes debt holders as well as is obliged for paying interest or repaying principal at the later date that is known as date of maturity. In case of secured bond, the issuer needs to pledge specific assets as collateral, if required, for paying to bondholders. The seniority of bond implies that in case, when there is default then preference is given to seniorbondovertheotherbonds.Forthebondholders,bondwiththeseniorityis advantageous, as it helps in mitigating risk. Hence, bond’s coupon rate would be lower. The sinking fund presence is advantageous because money is set aside for redeeming debt. The bonds funded by the sinking funds have very little chance to get default on payments of the interest and principal repayments. It helps in making it safer investments as well as more attractive towards investors, who are risk-averse (Downes and Goodman 2014).
3CORPORATE FINANCE The provision of call is stipulation on bond contract or the other instruments of fixed-income, which lets the issuer for repurchasing and retire security of debt. The call provision causing events are consists of underlying assets that reaches preset prices and specified anniversary, or the other date being reached. Deferred call implies that entity cannot call the bond for specified period. It helps in offering bondholder’s protection for the time-period. A deferred call accompanying provision of call gives issuer of bond, the right for call or to buy back its bond after initial deferent period that might last for five-10 years (Morrell 2018). The Canada plus call provision is the provision of call that compensates bond investors for the interest differential, which makes call unattractive for the issuer. Positive covenant is the promise for doing something or spending money such as building and maintaining fence, contributing for maintenance of shared driveway or others. The possible positive covenants that might be considered by Tuxedo Air could be maintaining audited financial reports, maintaining collateral in the good order of working, minimum specified working capital level or minimum specified current ratio (Ng and Tao 2016). The several possible negative covenants that might be considered by Tuxedo Air could be not pledging of the certain assets, cannot sell or lease certain assets without approval of lender and cannot issue any additional long-term debt. The conversion features in bond gives the option to bondholders for converting bond into equity of equity. Although Tuxedo Air is currently not a publicly traded company, however, if it goes public then it needs bondholders can get the chance for converting bond into the specified numbers of the equity shares. A floating-rate bonds are having the coupon rates, which are to some of the index. If the movement of index is in upward direction, then floating rate bonds also moves upward and if
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4CORPORATE FINANCE the index moves in downward direction then coupon rate also moves in the downward direction (Pilbeam 2018). Therefore, this memo includes analysis of costs and benefits of some of the features of different available options. The memo would be of great help to gain greater insights.
5CORPORATE FINANCE Reference Downes, J. and Goodman, J.E., 2014.Dictionary of finance and investment terms. Simon and Schuster. Morrell, P.S., 2018.Airline finance. Routledge. Ng, T.H. and Tao, J.Y., 2016. Bond financing for renewable energy in Asia.Energy Policy,95, pp.509-517. Pilbeam, K., 2018.Finance & financial markets. Macmillan International Higher Education.