Corporate Finance Report: Bond Issue for Tuxedo Air Expansion Project

This report is a memorandum prepared for the Board of Directors of Tuxedo Air, analyzing various expansion plans and financing options through bond issuance. It explores the different aspects of bond financing, including secured bonds, seniority, coupon rates, and the advantages of sinking funds. The memo also delves into call provisions, deferred calls, and Canada plus call provisions, offering insights into the protection and flexibility they offer. Furthermore, it examines positive and negative covenants, conversion features, and floating-rate bonds, providing a comprehensive overview of the costs and benefits associated with each option. The memo aims to assist the owners of Tuxedo Air in understanding the implications of different financing choices to support their expansion strategies, providing valuable information to make informed financial decisions.

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Table of Contents
Memorandum.............................................................................................................................2
Reference....................................................................................................................................5

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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
senior bond over the other bonds. For the bondholders, bond with the seniority is
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).

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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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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.

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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.