interest payments that the holder will receive (Ross, et al., 2016, pp.221). In Appendix A, a memo addressed to Ed Cowan has been attached which outlines the individual aspects associated with bonds, what the advantages and disadvantages are, and how each feature will impact the coupon rate of the bond. This memo should be of assistance to Ed as it shows how Tuxedo Air can structure their bond issue in a manner that is most beneficial for the company. Please see below to see an evaluation of all applicable bond features. Recommendation In terms of its stature, Tuxedo Air Inc is considered to be a small to medium sized organization and therefore, they need to ensure the upcoming bond issue is highly marketable to investors. If investors are unwilling to purchase the bonds, the $35 million in required financing will not be obtainable. In order to achieve their expansion goals, we recommend Tuxedo Air structure their bond issue with the general approach of holding coupon rates relatively low, which reduces the level of risk and makes the bond more attractive to potential investors. Let’s look at some specific features that can achieve this strategy. Secured bonds would be the best option for Tuxedo Air. They are those that are collateralized by assets such as property, equipment, or capital, and are commonly used by airlines and other transportation companies (Kenny, T., 2019). Secured bonds are a benefit to
MINI CASE ANALYSIS 2 both the issuer and the holder. The company has lower periodic payments due to the reduced coupon rate, while investors have greater security knowing they won’t be left with nothing in the event of default or inability to pay before maturity. Tuxedo Air must also recognize the purpose of their bond issue. They’re trying to raise capital for their growth project and are in need of financing quickly. Therefore, the maturity duration of the bonds should be relatively short. Short term bonds imply low risk and low yield, which is ideal for Tuxedo’s situation. If for whatever reason the company needed to issue longer term bonds, we recommend a call provision feature. While the coupon rates would be slightly higher, the ability to call at a specific date would be advantageous to Tuxedo because they could free themselves from further coupon payments at their own accord (Ross, et al., 2016, pp.235).
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- Spring '17
- Finance, Tuxedo Air