This lesson examines debt as a source of long-term capital, covering key instruments and the critical role of credit ratings.
3.1. The Nature of Debt Capital
Debt is a crucial source of long-term capital for many organisations, offering the advantage of tax-deductible interest payments. Treasurers must be able to evaluate the “characteristics and suitability of the main sources of long-term funds” available on debt capital markets .
Key debt capital market instruments include:
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Straight Bonds: Pay a fixed coupon and repay principal at maturity.
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Discount and Zero Coupon Bonds: Issued at a discount to face value with no periodic coupon.
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Medium Term Note (MTN) Programmes: Flexible programmes that can use fixed or floating rates.
3.2. Bank Debt
Bank borrowing is another primary source of long-term capital, structured as term loans, revolving credit facilities, or syndicated debt. A key competency is “negotiating and managing syndicated agreements” . The cost of debt can be structured in various ways, including stepped, ratchet, or the use of pricing grids.
3.3. Credit Ratings and Covenants
Credit ratings are vital in the debt markets, providing an assessment of an issuer’s creditworthiness that directly impacts the cost of borrowing. Loan documentation, including debt covenants, is a critical practical consideration. Covenants are legally binding terms that restrict the borrower’s actions to protect the lender’s interests.