Debt Issued by Corporations

Bilateral bank loans are the primary sources of debt financing for most corporations. However, other sources of financing are available for corporations of various sizes.

Bilateral Loan

A bilateral loan originates from a single lender to a single borrower. It is the primary source of debt financing for small and medium-sized companies as well as for large ones in countries with undeveloped bond markets.

Syndicate Loan

A syndicated loan is a loan offered by a group of lenders called the “syndicate,” to a single borrower. Syndicated loans are primarily originated by banks and extended not only to companies but also to governments and government-related entities.

Commercial Paper

Commercial paper is a flexible, available, and relatively low-cost short-term financing option to meet working capital and bridge financing needs. The largest issuers of commercial papers are financial institutions, and their maturities are generally less than three months but can range from overnight to one year. Rolling over the paper is the payment of maturing commercial paper with the proceeds from new issuances.

Defaults on commercial paper have been relatively rare because of the short maturity. In fact, prior to the 2007-2008 financial crisis, commercial paper issuers in the US posted approximately 3% default of their issues. However, after the crisis, the practice of buying backup loan commitments as a form of insurance for commercial paper is common in the market.

Euro Commercial Papers

Euro commercial papers (ECP) are issued in the international market and can be issued in any currency. Short-term refers to 5 years or less, intermediate-term is between 5 and 12 years, and long-term is over 12 years. Securities with maturities between 1 and 12 years are called notes, whereas those with maturities exceeding 12 years are called bonds. Medium-term notes (MTN) are issued to fill the funding gap between commercial paper and long-term bonds.

Under a serial maturity structure, a portion of the total outstanding debt is retired or bought back by the issuer each period. Conversely, with a term maturity structure, the bond’s principal is paid as a lump sum at maturity.

Corporate Notes and Bonds

These are debt instruments issued by private companies. They can be privately placed or sold in public markets. Their maturity ranges from 1 to over 30 years. They may have fixed, floating, payment-in-kind (PIK), or zero-coupon structures, and may also have a serial or term maturity structure. They may be unsecured or backed by collateral of various forms.

Question

A bond issued with a payment structure that is paid as a lump sum at maturity is called:

1. Rolling over the paper.
2. A term maturity structure.
3. A serial maturity structure.

Solution

The correct answer is B.

Under a term maturity structure, the bond’s principal is paid off in one lump sum at maturity.