Bilateral bank loans are the primary source of debt financing for most corporations. However, other sources of financing are available for corporations of various sizes.
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 companies in countries with undeveloped bond markets.
A syndicated loan is a loan offered by a group of lenders, called the “syndicate,” to a single borrower. These loans are primarily originated by banks, and the loans are extended to companies but also to governments and government-related entities.
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 2007-08 financial crisis, commercial paper issuers in the US defaulted on approximately 3% of their issues. However, after the crisis, the practice of buying backup loan commitments as a form of insurance for commercial paper became commonplace 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 securities with maturities greater than 12 years are called bonds. Medium-term notes (MTN) are issued to fulfill 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 and 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.
A bond issued with a payment structure that is paid as a lump sum at maturity is called:
A. A serial maturity structure
B. A term maturity structure
C. Rolling over the paper
The correct answer is B.
Under a term maturity structure, the bond’s principal is paid off in one lump sum at maturity.
Reading 51 LOS 51g:
Describe types of debt issued by corporations