For the capital requirements, the companies generally have a choice between debt and equity. Within debt also, the company can choose between public debt and private debt.
1.1. Private Debt
a. Private debt is generally a non-tradable debt.
b. It is typically a floating rate-based debt, which is tied to a reference rate plus a spread. It could also be on the basis of fixed principal plus variable interest.
c. The private debt could be in the form of a bilateral loan, i.e. where one bank lends to one company.
d. Or, it could also be a syndicated loan, i.e. a syndicate of many banks lending to a single company. These syndicated loans are mostly securitized loans.
e. Private debt is generally more expensive than public debt or bonds, as these have different fees and reporting requirements.
1.2. Commercial Paper
a. The commercial paper offers higher yields than sovereign bonds and non-sovereign bonds.
b. These are very short-term instruments, generally unsecured.
c. These are issued mainly to finance the working capital, accounts receivable, inventory, other short-term liabilities, and seasonal needs of the corporate.
d. The commercial papers are also used for bridge financing, mainly when the company has a requirement of long-term finance and the markets are currently not conducive to obtaining the same. During this period, the companies can fulfill the requirement gaps with the help of short-term finance such as commercial paper.
e. Commercial papers are generally issued by financial companies, but there are some big non-financial corporations as well, who are active in commercial paper markets as well.
f. The duration of a commercial paper range from overnight to one year (and the term is typically a 3-month period).
g. On the basis of ratings, the commercial papers can be divided into a prime paper and a nonprime paper. The prime papers are the ones with the ratings of P / A / F, by the rating agencies. All the other bonds are categorized as non-prime papers.
h. The commercial papers are typically retired either by paying them out or rolling over another paper. This introduces the rollover risk in the case of bonds. Thus, to reduce such a risk the issuer generally has a backup line of credit.
i. Since this is a short-term credit form; the investors typically hold them to maturity. Thus there is a low volume of secondary trading for such instruments.
j. There are two most common types of commercial papers, i.e. U.S. Commercial Paper and the Euro Commercial Paper.
The S. Commercial Paper is mainly issued in the U.S., and it is issued on a discount basis (i.e. it does not carry a coupon on it). The settlement of these commercial papers takes place on the same day, generally.
The Euro Commercial Paper is issued internationally. It is an interest-bearing instrument, which is settled on a T+2 basis.
1.3. Corporate Notes
a. Corporate notes are the short-term, medium-term, and long-term debt instruments for the corporate. The term of a short-term corporate note is less than 5 years, a medium-term note is between 5 and 12 years, and a bond with a term greater than 12 years is a long-term note.
The short and medium-term notes are generally referred to as notes, whereas, a long-term note is referred to as a bond.
b. These are coupon-bearing instruments, having either fixed or floating rates of interest. The floating rate notes could be based on other interest rates, inflation, or credit ratings as a reference.
The coupon could be paid on an annual, semi-annually, or quarterly basis.
c. The notes could also be issued as zero coupons, deferred coupons, or PIK bonds.
d. The bonds may or may not be collateralized, and may also have the embedded option attached.
e. Generally, the bonds are issued for a term starting 1 year up to 30 years. Sometimes, the bonds may also be issued for a greater term, i.e. 40 years, 50 years, or even 100 years. The bonds with a term of 100 years are called century bonds.
f. The principal of the bonds may have serial maturity, i.e. a portion of the principal matures each year.
They may also have a term maturity, i.e. the principal is retired in entirety at the end of the term of the bond.
The bonds with call options may also have the random
It may also carry a sinking fund or a purchase fund provision.