Marriott Debt Restructuring

Marriott Debt Restructuring - BONDSANDEQUITY:INTRODUCTION...

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BONDS AND EQUITY: INTRODUCTION Bonds are fixed claims Equity is a residual The interests of shareholders (owners) and bondholders  are not always aligned Contracts can be written to deal with the divergent  interests  Note in general shareholders (and their agents) write the  contracts that maximize shareholder wealth  06/06/11 Financial Contracting: Example covenants 1
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FINANCIAL CONTRACTING -- BOND  COVENANTS There is empirical evidence contracting costs are  important How are debt contracts written to control the bondholder- stockholder conflict? How are covenants, in particular, used to mitigate these  problems? Note that the price paid by bondholders will reflect  potential wealth transfers 06/06/11 Financial Contracting: Example covenants 2
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BONDS AND EQUITY: INTRODUCTION Bonds are fixed claims Equity is a residual The interests of shareholders (owners) and bondholders  are not always aligned Contracts can be written to deal with the divergent  interests  06/06/11 Financial Contracting: Example covenants 3
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SOURCES OF CONFLICT BETWEEN  BONDHOLDERS AND STOCKHOLDERS Dividend Payments Claim Dilution -- Issuing more debt Overinvestment (Asset Substitution) Underinvestment 06/06/11 Financial Contracting: Example covenants 4
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ARE COVENANTS RELEVANT? Irrelevant if there is costless recapitalization or if  takeover market or reputation considerations control  managerial behavior Relevant if external market cannot control behavior In this case,  there would be a unique set of financial contracts  that maximize firm value. 06/06/11 Financial Contracting: Example covenants 5
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TYPES OF COVENANTS Restrictions on production/investment policy -- keep firm  from taking wealth away from bondholders. Restrict: Financial investments Disposition of Assets Secured debt Mergers Maintenance of assets 06/06/11 Financial Contracting: Example covenants 6
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TYPES (CONTINUED) Restrictions on payment of dividends Cash dividends Other distributions such as redemption and retirement of other   securities, capital reductions --  whether in cash, in kind or in form  of debt obligations of the company Restrictions on subsequent financing limits on debt and priority of additional debt limits on rentals, leases and sale-leasebacks 06/06/11 Financial Contracting: Example covenants 7
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TYPES (CONTINUED) Modifications of payoffs to bondholders Sinking funds Convertibility provisions Callability provisions Specification of bonding activities by firm Required reports Accounting techniques Officers  certificate of compliance Purchase of insurance 06/06/11 Financial Contracting: Example covenants 8
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This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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Marriott Debt Restructuring - BONDSANDEQUITY:INTRODUCTION...

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