BRN 482 Corporate Financial PolicyClifford W. SmithSummer 2007Handout 5* Covers readings on course outline through Barclay/Smith (1996)

Financial ArchitectureLeverageBond covenantsPublic vs. private debtMaturityPriorityConversion rightsCall provisions

Private vs. Public DebtLarger issues usually publicfixed registration feesunder-diversification of private lenders

The riskier the debt, the more likely that it will be privateeasier to renegotiateusually contains more, and more specific, contract provisions

Relation between Yield on Net Proceeds & Issue Size for Representative Private Placement and Public Issue DebtYield on Net ProceedsYNP (%)Aaa (Private)Aaa (Public)Issue Size ($)SAAA

Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement and Public Issue Debt

Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement and Public Issue DebtBaa (Private)Yield on Net ProceedsYNP (%)Aaa (Private)Aaa (Public)Issue Size ($)SAAASBAABaa (Public)

Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement and Public Issue DebtBaa (Private)Yield on Net ProceedsYNP (%)Aaa (Private)Aaa (Public)Issue Size ($)SAAASBAABaa (Public)

Investment Opportunity SetAssets inPlaceGrowthOpportunitiesCost of Longer Maturity Low High (Underinvestment)

Predicted Maturity Long Short

Investment Opportunity SetAssets inPlaceGrowthOpportunitiesCost of Low Priority Low High Fixed Claims(Creditor Conflicts)

Assets inPlaceGrowthOpportunitiesCost of Low Priority Low High Fixed Claims(Creditor Conflicts)

Concentration of Lower Greater Priority Classes

Investment Opportunity Set

Deregulation and Debt MaturityLeverage and Debt Maturity in the Telecommunications industry 1974-1994

Investment Opportunity SetFinancial Architecture Leverage High Low Maturity Long Short Priority(Table 5) Diffuse Concentrated Conversional RightsLow High Leasing(Table 4)High Low

Compensation Level of Pay Low High Conditional Pay Low HighAssets inPlaceGrowthOpportunities