Lease financing an alternate form of borrowing is

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Lease financing An alternate form of borrowing is leasing. Leasing firms finance capital expenditures for equipment such as vehicles, production machinery, and computer equipment. Some leasing firms are associated with the equipment manufacturer (such as GMAC or Ford Credit or IBM's fmancial services). Other leasing firms are independent and provide a full range of lease services. The leasing firm analyzes the credit risk associated with the lease, bearing in mind that the leased assets are held as collateral, and that some of the risk can be mitigated by tailoring the lease terms. At the end of January 2011, Home Depot reported on its balance sheet lease obligations of $452 million; payable in varying installments through January 31,2055. 4-7 Module 4 I Credit Risk Analysis and Interpretation L 0 2 Explain the credit risk analysis process. Publicly traded debt Issuing debt securities in capital markets is a cost-efficient way to raise capital. Companies issue short-term or long-term debt depending on the specific need for funding. Commercial paper is short term; because maturities do not exceed 270 days the borrowing is exempt from SEC regulations. Companies use proceeds from commercial paper to finance short- term operating or working capital needs. Commercial paper is issued primarily by financial com- panies (commercial banks, mortgage companies, leasing companies, and insurance underwriters) although large manufacturers and retailers also issue commercial paper. Home Depot did not have any commercial paper outstanding at year end, January 30,2011. The year before, it had an average daily commercial paper balance of $55 million but this was repaid by the end of the fiscal year. It is most often the case that companies pay a lower rate of interest for short-term commercial paper than for longer-term bonds or notes. The average interest rate on Home Depot's commercial paper during fiscal 2010 was 1.1%. To secure longer-term funding, companies issue bonds or debentures. For example, at Janu- ary 30,2011, Home Depot had long-term debt of $ 9,288 million arising from Senior Notes which mature between March 2011 and September 2040. Home Depot's debt footnote, reproduced in Exhibit 4.2, shows that interest rates on those notes range from 3.95% to 5.875%. Debt that is offered for sale to the public is regulated by the SEC even if the company's stock does not trade publicly. Generally, the entire face amount (principal) of the bond is repaid at maturity, and tax- deductible interest payments are made in the interim (nearly always semiannually). After they are issued, corporate bonds can trade on major exchanges but most of the trading is decentralized, as dealers trade the bonds in over-the-counter markets. Investors who buy the bonds when they are issued and in subsequent re-sales, are concerned with the issuing company's ability to meet semiannual interest payments (short-term liquidity) and to repay the principal at maturity (long- term solvency and cash flow coverage).
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