Equity and Fixed Income Investment: Syndicated Loan, Bond Issue, and Medium Term Note Programme

This report analyzes the advantages and disadvantages of syndicated loan, bond issue, and medium term note programme as sources of financing for LinkedIn's expansion project. It also compares the cost of finance of each source and recommends the most appropriate source of finance.

EQUITY AND FIXED INCOME INVESTMENT
PART 1
Introduction
LinkedIn, a giant behemoth technology company has been proposing to raise funds from the
market for its expansion project. The company is stationed at Sunnyvale, California. The
company is proposing to build new facilities to relocate its operations and requires funds to
the tune of 300 Million dollars. The report deals with the various sources to raise the required
funds mainly through the following:
(a) Syndicated Loan:
(b) bond issue;
(c) Medium term note term programme.
The note analyses the following of the aforesaid three method of financing of the proposed
project:
(a) Advantage and disadvantage of each source of financing;
(b) Appraisal of the given methods of raising finance and then choosing the most
appropriate source of finance;
(c) Contrast and analyse the cost of finance of each source.
Syndicated Loan
Under these loan structure, two or more lenders jointly provide the loan to one or more
borrowers for the purpose of business. The duties of the different lenders may be different but
they sign the same contract. Under the said structure, one among the lenders is appointed as
the agency bank to regulate and manage the loan matter on behalf of other syndicate
members. The features of the loan has been detailed here-in-below:
(a) The loan is generally for a large amount and the duration of the loan is long term. The
loan is generally used for funding long term project, Merger and Acquisitions, expansion
of operations in giant industries like telecommunication, petrochemical etc.
(b) The time and effort involved for financing the project is less as the arranger is generally
responsible for providing the preparation work and making the syndicate after the terms
of the loan have been negotiated between the borrower and the lender. Further, during
the implementation of loans, the borrower is not required to face all the members of the
syndicate rather the same needs to be done with the agency bank designated for this
purpose. Similarly, for the purpose of relevant withdrawal, repayment of principal,
interest and other management related work the same needs to be handled by agency
bank.
(c) There are diversified approached to syndicated loan. The same can subsume various
types of loan like fixed term loans, revolving loan, Standing Letter of Credit as per
requirement of the borrower. Further, the loan can be available in varied currencies as
per the requirement of the borrower like USD, GBP, INR, AUD etc.
(d) The syndicated loan helps to establish a positive image of the borrower in the market as
the loan is generally approved after understanding and analysing the feasibility of the
project. As the loan has been approved, post verification of financial and operation

performance of the borrower the same enhances the credibility and reputation of the
borrower.
(e) Multiple currencies can be adopted in a single syndicated loan i.e. part loan can be taken
in USD part in RMB or any other preferable currency.
(f) Unified Contract: There is a single unified contract symbolising only one contract rather
than entering multiple contract with multiple lenders thus easing the terms and avoid
hassles of multiple signing;
(g) Charges included under the arrangement are mainly arrangement fee, underwriting fee,
fee of commitment and agency fee;
(h) For qualifying as a borrower, one must be a legal person who is capable of entering into
contracts. (Bank Of China, n.d.)
Advantages of Syndicated Loan
The advantages of syndicated loan has been detailed here-in-below:
(a) It is s long term loan;
(b) Loan is available in multiple currencies;
(c) Loan can be taken from multiples lenders in one go;
(d) Only a single contract needs to be signed;
(e) Loan can be taken under multiple stages and not in a single go;
(f) Extra money can be taken in terms of the contract;
(g) Helps in networking and create new contacts; (Hitachi, Ltd, 2018)
(h) Exposure and limit of a lender is limited due to diversification of loan;
(i) Saving of money and time as only agent bank needs to be contacted;
(j) Loan pricing structure is incredibly flexible;
(k) There are no penalty prepayment rights; (Anon., n.d.)
(l) Terms of the loan can be abbreviated;
(m) Can open doors to incredible business opportunities.
Disadvantages of Syndicated Loan
The disadvantages of syndicated loan has been detailed here-in-below:
(a) Negotiating with one bank can take several days and can be a time consuming process.
Further, since too many banks are involved the agent banks needs to get the same
confirmed from all other banks before disbursement of loan to borrower; (Furtado,
2016)
(b) Managing the relationship between different banks is an ardent risk and task and shall
require investment both of time and money; (Anon., 2004)Fixation of responsibility:
Since multiple banks are involved fixation of responsibility cannot be determined in
case the borrower defaults the loan;
The leading companies that have taken syndicated loan includes:
Tata Group firms of 2.5 Billion dollars: The borrower included Tata Communications, Tata
Motors, Tata Power and Tata Steel borrowed funds from syndicate of banks.
Process Flow of Syndicated Loan

The process flow of syndicated loan has been detailed here-in below:
(Parker, 2016)
Rate of Interest under Syndicated Loan in Sierra –Leone
The lending rate of interest in Sierra Leone has been reported at 17.92% in 2017 by World
Bank Collection of development indicators. The data of historical interest rate has been
presented here-in-below:
(Trading Economics, 2018)
Bond Issue
Bonds is one of the common method of raising funds in the primary market. A bond also
known as a fixed income security or a debt security are issued by the borrower to raise
finance. These are financial contract entered into by the borrower and investor who subscribe
to the instrument. In the said instrument, the borrower is under an obligation to pay a fixed
rate of interest to the investor at a definite interval of time usually the coupon rate.

The bonds can be issued for both long terms and short term depending on the needs of the
borrower. Further, the bond shall contain the clauses for prepayment or repayment of
principal at definite interval. It may also contain the following clauses:
(a) Prepayment clause;
(b) Callable Bond;
(c) Putable bond;
(d) Extendible bonds;
(e) Convertible bonds
Further, the rate of interest that can be applicable to bonds be fixed or floating. Under fixed
rate of interest a fixed liability needs to be borne by the borrower generally a rate of interest
like 6%, 7% etc. Under a floating rate of interest rate of interest is dynamic and fluctuates
from year to year or month to month depending on the covenants of bond. Further, the rate of
interest structure is on the lending rate plus a certain premium in basis points like LIBOR +
200 Bps where Bps represents 1/100 of a percentage. (Management Study Guide Privacy
Policy, 2018)
Features of bond
The feature of bond have been detailed here-in-below:
(a) It is a financial instrument for raising finance in the financial markets;
(b) It can be issued by public, private and government agencies;
(c) Bonds have a specific maturity date and a coupon rate; (Investing Answers, 2018)
(d) Payments are made at regular interval of time;
(e) It is issued for both long term and short term duration depending on project needs;
(f) The payment of principal is generally made at the end of maturity date however
covenants may be made flexible as per requirement.
(g) Yield of the bond are ever changing and accordingly the price of the bonds;
(h) Bonds may be collateralised meaning against a particular asset or security or non-
collateralised meaning not against any particular asset or security.
(i) Bonds are rated by Credit rating agencies based on the financial and operational
performing Agencies. Credit rating agencies like Moody, S& P, Fitch etc. (Station,
1998)
(j) Bonds can be issued as per requirement of funds;
Advantages of bond
The advantages of issuing bonds to the third parties have been detailed here-in-below:
(a) The bonds have a lower rate of interest compared to equity;
(b) Interest paid on bonda are tax deductible;
(c) The amount of taxes paid by the company are generally reduced;
(d) Benefit of trading in equity;
(e) Selling Asset: It offers an alternative to selling off the asset and the company can
collateralise the asset to borrow funds from the market.
(f) Bonds can be issued at a cheaper rate compared to shares thereby reducing the cost of
financing the project;

(g) It is flexible and can be repaid by the company as per the terms and conditions of the
bond; (ICE Data Services, 2018)
(h) Bonds are tradeable in the secondary market and can be repurchased by the company
when the yields are extremely high;
Disadvantages of bond
The disadvantages of issuing bonds to the third parties have been detailed here-in-below:
(a) Regular return needs to be paid to the investor and default of which can lead to
institution of legal proceedings against the company;
(b) It is riskier;
(c) Bonds are convertible into equity of the company;
(d) They have limits and covenants and may restrict further borrowings of the company;
Process Flow of Issuance of bonds
The process flow of issuance of bonds has been detailed here-in below:
(Parsons, n.d.)
Rate of Interest under Syndicated Loan in Sierra –Leone
The rate of interest in Sierra Leone on bonds has been reported at 16.50% and the average
rate of interest being 19.5% from 2000 to 2018. ( TRADING ECONOMICS, 2018) The data
of historical interest rate has been presented here-in-below:

Medium Term Note Programme
A medium term note programme is a debt instrument which generally matures in 5 to 10
years but the same may range from 1 to 100 years depending on the needs of finance of the
company. The notes can be issued on the basis of fix or floating depending on market
conditions and risk bearing capacity of the issuer of the notes. Fixed rate Medium term notes
are not fluctuating and involve a fixed outflow of resources while a floating rate of note
implies a flexible payment depending on financial market condition. The structure of
payment may be LIBOR, EURIBOR or any other prevailing currency. (Finance Train , 2018)
The notes can be issued with options embedded in it like call option, put option, extendible
option etc. These notes are generally issued as Senior, unsecured debt of investment grade
credit rated entities. They are flexible to both borrower and lender in terms of documentation
and structures of such notes.
Features of Medium Term Notes
The feature of Medium Term Notes have been detailed here-in-below:
(a) It is type of corporate debt security;
(b) They can be sold under varied stages;
(c) They are sold through an agent;
(d) They are registered with the authorities;
(e) They can range from 9 months to 100 years;
(f) They are flexible and dynamic and can be designed as per the needs of the issuer;
(g) The notes can be denominated in any currency of choice reducing the foreign currency
risk on such Notes;
(h) They can have special features like cap and floor;
(i) They can be combined with various derivative structures;
(j) They are distributed by best efforts of investment banker;

(k) They involves underwriting commission;
(l) It is in between commercial paper and bonds;
(m) They can be collateralised or non-collateralised; (Finance Train , 2018)
(n) They are sold in small amounts continuously and intermittently;
(o) They can be designed as per the requirement of investor.
Advantages of Medium Term Notes
(a) Medium Term Notes always offer to its investor with the choice of short term or long
term proposal of investment.This type of notes is advantageous for the situation when
the persons investment proposal fall beyond the investment options available in the
market like the municipal bonds and the other bank notes without going into the long
term investment pattern.It also benefit the company business as the business can get
the cash flow from investors.Medium Term notes also can be issued to the investors
with call options or without it. (Anon., 2017)
(b) The interest rates related to call options are often high to investors so the company
has the privilege to retire or call the bond before the maturity date of bond.This gives
a privilege to business of lower rates without any commitment to any other options.
(c) Medium term notes offers a plenty of choice to its investors as the investors can
choose to go for a long term investment or a short term investment.
(d) Medium term notes are quite cost effective unlike other investment proposal.
(e) Using Medium term notes for long term process is beneficial as one can get the
maximum funding from MTR through long term funding process.
(f) To go for long term or short term investment in MTR is completely dependant on the
investors,but the investors should not go for any investment program without
completely understanding its whole process.
Disadvantages of Medium Term Notes
The disadvantages of issuing bonds to the third parties have been detailed here-in-below:
(a) Regular return needs to be paid to the investor and default of which can lead to
institution of legal proceedings against the company;
(b) It is riskier;
(c) The holder of Medium term notes can control the board in case the company default
the same.
(d) They have limits and covenants and may restrict further borrowings of the company.

Appropriateness and comparison of the method of finance
The method of finance which shall be appropriate in given case shall depend on the nature of loan
needed, the returns from the project and other allied factors.
In the present case assuming the loan is require for a long duration Medium Term Notes shall not be
used as the same stands between the commercial paper and the bond and hence not suitable.
Further, as far as bond is concerned they are with much covenants and disclosure and are regulated
by the regulatory authorities and hence are prone to much documentation and hassles. Further, the
cost of issuing bond is higher as there is underwriting involved in procuring the funds through
market. The cost may increase the cost of procuring of funds for the company. Thus syndicate loans
shall be preferred as the cost of issue of such fund is lower.
In addition to the above, if the company wishes their debt to be listed in the market then bond shall
be preferred over syndicate loan. Further, the loan provides flexibility to the company to repay or
procure its own instrument from the market and the same may be convertible into equity as per
requirement of the company.
Further, if debt needs to be taken for a medium term than Medium Term Notes shall be preferred
over other two instruments.
Thus, in short all three instruments are popular and can be used as source of finance depending on
the need of organisation and all the three instruments have its own advantages and disadvantages
based on requirements of the organisation.
Answer2:
The formula for computation of weighted average cost of capital is Cost of Equity* Weight of Equity+
Cost of debt after tax* Cost of debt..
Further, the weight to be used for computation of cost of capital is a matter of availability of data
and generally the market value of debt and equity shall be used for the computation weighted
average cost of capital.
Further, the market value of debt and equity represent true weight of debt and equity as if the funds
are borrowed from market they shall be in the same value. On the other hand, taking book value of
debt and equity does not present a true picture on account of equity and debt being not present at
real value in the books of company.
On the other hand, if the liquidation value of debt and equity the same shall not represent a real
picture as company is not on the verge of liquidation and is a going concern.
The detailed rationale for using market weights has been presented here-in-below:
(a) These represent the actual weight in which the fresh capital shall be borrowed by the
company;
(b) These are easy to ascertain and available in the market if the shares are listed;
(c) These are not prone to estimation or any accounting gimmicks;
(d) They represent a true picture;
(e) The same incorporates market sentiments of debt and equity.

Accordingly, on the basis of the above, the true weight that shall be used for the computation of
weighted average cost of capital is Market value of Debt and Equity. Accordingly, the weight of debt
and equity is Debt : Equity=2000:7000 or 2:7
Answer 3
The formula for computation of weighted average cost of capital is Cost of Equity* Weight of Equity+
Cost of debt after tax* Cost of debt.
Further, the cost of equity represents the rate of return desired by the investors or the shareholders
of the company for their investment in the project. It also represents the minimum rate of return
desired by investors of the project otherwise the project shall be dropped. In the present case the
cost of equity is 11% which is generally computed by using Capital Asset Pricing Model which is an
additive model. The formula for computation of cost of equity has been enumerated here-in-below:
Cost of Equity= Risk Free rate of return + Beta (levered)* Market Premium.
Further, as far as the cost of debt is considered, the same represent the claim of debt holders of the
company. It represents the minimum rate of return required by the investors of the project below
which they shall not fund the project and project shall be dropped. In the proposed case the cost of
debt has been given at 5%. Further, the same shall be reduced bv tax amount for the computation of
Weighted Average Cost of Capital.
In Case Tax Rate is Zero.
Cost of debt=5%
In Case Tax Rate is 20%
Cost of debt=5%*(1-20%)=4%
In Case Tax Rate is 40%
Cost of debt=5%*(1-40%)=3%
Accordingly, the computation for weighted average cost of capital has been presented here-in-
below:
The formula for computation of weighted average cost of capital is Cost of Equity* Weight of Equity+
Cost of debt after tax* Cost of debt.
In case cost of debt is 5%
=(7*11%+5%*2)/9
=9.67%.
In case cost of debt is 4%
=(7*11%+4%*2)/9
=9.44%.
In case cost of debt is 3%
=(7*11%+4%*2)/9

=9.22%.
Thus, on the basis of above it shall be seen that the weighted average cost of capital depends on tax
rate and shall change on the basis of tax prevalent in the economy.
References
TRADING ECONOMICS, 2018. Sierra Leone Interest Rate. [Online]
Available at: https://tradingeconomics.com/sierra-leone/interest-rate
[Accessed 21 October 2018].
Anon., 2004. The syndicated loan market. [Online]
Available at: https://www.bis.org/publ/qtrpdf/r_qt0412g.pdf
[Accessed 21 October 2018].
Anon., 2017. Medium Term Notes. [Online]
Available at: https://issuu.com/banksinstruments/docs/advantages_that_you_get_from_the_me
[Accessed 21 October 2018].
Anon., n.d. Syndicated Loan. [Online]
Available at: http://www.boc.cn/en/cbservice/cb2/cb22/200806/t20080627_1324062.html
[Accessed 21 October 2018].
Bank Of China, n.d. syndicated Loan. [Online]
Available at: http://www.boc.cn/en/cbservice/cb2/cb22/200806/t20080627_1324062.html
[Accessed 21 October 2018].
Finance Train , 2018. What are Medium-term Notes. [Online]
Available at: https://financetrain.com/what-are-medium-term-notes/
[Accessed 21 October 2018].
Furtado, R., 2016. The Advantages And The Disadvantages Of A Syndicate Loan. [Online]
Available at: https://blog.ipleaders.in/advantages-disadvantages-syndicate-loan/
[Accessed 21 October 2018].
Hitachi, Ltd, 2018. Syndicated Loan Benefits. [Online]
Available at: https://www.hitachibusinessfinance.com/syndicated-loan-benefits/
[Accessed 21 October 2018].
ICE Data Services, 2018. What Are the Advantages and Disadvantages to Issuing Bonds in Order to
Raise Capital?. [Online]
Available at: https://www.fool.com/knowledge-center/advantages-and-disadvantages-to-issuing-
bonds-in-o.aspx
[Accessed 21 October 2018].
Investing Answers, 2018. Bond. [Online]
Available at: https://investinganswers.com/financial-dictionary/bonds/bond-1287
[Accessed 21 October 2018].
Management Study Guide Privacy Policy, 2018. What are Bonds ?. [Online]
Available at: https://www.managementstudyguide.com/what-are-bonds.htm
[Accessed 21 October 2018].

Parker, L., 2016. Ipreo and Symbiont to overhaul the $4.7 trillion global syndicated loans market.
[Online]
Available at: https://bravenewcoin.com/insights/ipreo-and-symbiont-to-overhaul-the-4-7-trillion-
global-syndicated-loans-market
[Accessed 21 October 2018].
Parsons, N., n.d. LGUGC and the Flotation Option JGT -06.27.03 Guarantees FIs against LGU default
Pays FIs in case of default Provides loans Underwrites bond issues Calls.. [Online]
Available at: https://slideplayer.com/slide/4274286/
[Accessed 21 October 2018].
Station, E. R., 1998. 3 Characteristics of Bonds. [Online]
Available at: https://www.thestreet.com/story/229151/1/bonds-primer-what-bonds-have-in-
common.html
[Accessed 21 October 2018].
Trading Economics, 2018. Sierra Leone - Lending interest rate. [Online]
Available at: https://tradingeconomics.com/sierra-leone/lending-interest-rate-percent-wb-data.html
[Accessed 21 October 2018].