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Debt Notes – Play of how much risk and reward parties are willing to exchange
1. 8.625% Senior Unsecured Notes
- Debt issued by companies / Issuers.
- They borrow money from investors. Investors get an annual coupon of 8.625%,
- Investors provide the capital to the issuer and, in return, receive a periodic interest payment
- 8.625% is higher yield than 7.75%
- Higher return to investors, but often indicates higher risk. The issuer might be in a weaker
financial position or have less creditworthiness.
- Not backed by collateral. But has the company’s credit worthiness
- However, unsecured notes have higher yield than secured notes
- Behind secured holders, but ahead of equity holders
- Its senior, meaning higher repayment priority, so repaid before subordinated debt
- Maturity date >> longer the date, higher the interest rate fluctuation risk / credit risk / MV
volatility
Loan amortization - refers to the process of repaying a loan over time through regular payments

Collateralized Debt Relating to Stock Monetization - borrower uses their stock holdings as collateral to
secure a loan or debt financing

2. A1-A2-A3-A4-B1-B2-B3-B4 ratings on Term Loans

- A1 – shorter period / higher amortization / low risk & low IR
- B4 – long term / bullet payment& low amortization / high risk & high IR

3. Typical debt waterfall in terms of seniority

I. Senior Secured RCF – first lien
II. Senior Secured Term Loan B-3
III. Collateralized Debt Relating to Stock Monetization
IV. Secured Notes 7.7%
V. Capital Lease – given there’s an asset backing them
VI. Senior Unsecured Notes 5.67%
VII. 8.0% Senior Unsecured Notes
VIII. Senior Unsecured Notes
IX. Notes Payable
X. Unsecured Guarantees (contingent) - contingent liabilities and only become actual
liabilities under specific conditions, making them junior to all other direct debt
obligations.

4. Holding Companies - financial vehicle for owning and controlling other assets & companies
1) Exists for controlling companies
2) Hold co. are easy to create and move around countries
3) Limit the financial and legal liability exposure
4) Enjoy the benefit of protection from subsidiary losses
o Hold Co. may experience capital losses or decline in net worth
o The bankrupt co’s creditors cannot legally pursue the Hold Co. for remuneration.
o If a holding company is set up correctly, the debt liability of one subsidiary won’t
impact any others; if one subsidiary were to declare bankruptcy, it would not impact
the others.
 5) Can enforce vulture capitalism on subsidiaries
6) Reduced debt / operations visibility to external stakeholders
7) How do they make money – sub dividend / selling co. equity / leasing equipment

5. Gross Leverage vs Net Leverage

Gross leverage Net leverage

Before liquidity After liquidity
Peek into overall leverage Peek into short term solvency
Helps in setting LT debt policies Helps in short-term liquidity mgmt

6. Off-balance sheet items

1) Financing – Operating Leases - not capitalized on the balance sheet
2) Financing – SPVs - whose liabilities might not appear on the parent co.’s B/S.
3) Contingent Liabilities – Legal claims – expected yet not transpired
4) Contingent Liabilities – Guarantees – in case of a default
5) Purchase Obligations
6) Pension Liabilities - Future obligations to pay pensions to employees, which may not be
fully funded.
- Defined contribution plan – employee makes the inv choice. Employer gives the $$
- Defined benefit plan - monthly outcome is determined ahead of time. That’s fixed. There’s a
plan administered by employer. Employer contribution varies to match those pre-determined
monthly outcomes
7) Deferred Tax Liabilities

7. M&A Scene
On 11/1/14, Company A closes its acquisition of Company B The acquisition price was
$1,450MM and paid entirely with proceeds from a new $2,000MM bond issuance that closed
on 10/15/14.Assume financing costs associated with the debt issuance are $50MM. Assume
legacy debt at Company B is refinanced with the new debt proceeds On 11/15/14, Company A
redeemed $500MM of notes using borrowings from its revolver.

10/15/14 - Net proceeds from the bond issuance >> 2,000MM – 50MM – 1,950MM
11/1/14 – Co. B acquired for 1,450MM using above 1,950MM. Remaining for B’s debt
servicing

Increase in Long-term Debt Proceeds (Cash): +$1,950MM (from bond issuance).

Increase in Long-term Debt: +$2,000MM (new bond issuance)
Decrease in Cash: -$1,450MM (used for acquisition).
Acquired Assets of Company B: +$1,450MM (recorded at acquisition cost)
Decrease in Cash: -$500MM (used to refinance Company B's legacy debt).
Net Borrowings from Revolver: +$500MM (used to redeem notes)
Increase in Revolver Borrowings: +$500MM (used for note redemption)