A Pragmatist's Guide to Leveraged Finance: Credit Analysis for Bonds and Bank Debt (Applied Corporate Finance) by Kricheff Robert S

Author:Kricheff, Robert S. [Kricheff, Robert S.]
Language: eng
Format: azw3
Publisher: Pearson Education
Published: 2012-02-26T16:00:00+00:00

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Other puts and calls can evolve and be triggered by events that are usually covered in the various covenants of the debt securities. These are addressed in Chapter 16. They typically are triggered by significant asset sales or a change in the company’s ownership.

A Pragmatic Point on Early Refinancing of Debt

When a bond is trading at a yield much lower than its coupon, analysts often try to analyze whether the company will look to refinance the debt. Typically this is done by running a net present value of leaving the bonds outstanding versus a net present value of issuing the new debt and retiring the old debt. This must include any premiums necessary to call the old bonds and fees associated with issuing the new bonds and an assumption on the interest rate of the new financing.

A quick way to get a glimpse of whether it makes sense to do this is to take the existing bond’s call price; this gives a proxy for how much funding is needed to retire the existing bonds. Then multiply this amount by the likely new issue coupon. (The YTW on the existing bonds is a good proxy.) Finally, see if this new figure, which is a proxy for new financing costs, is meaningfully less than the bond’s existing coupon; if it is, then it is usually worth exploring refinancing possibilities in more detail, such as using a net present value analysis. Table 14-4 shows an example.

Table 14-4. Quick Check on Refinancing

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