Public issue not worth it unless issue is very large

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Public Issue – not worth it unless issue is very large because of high costs (high fixed cost). Also, company has to be very safe. Private placement – better for medium sized companies with a lack of credit standing for public issue or if financing needs too small to justify large fixed cost of public issue. – longer term and have fixed rate compared to bank loan o overseas: Eurobond mkt (but would need good credit) o finance company – make loans to risky customers, and have lower regulatory costs b. Soporifics needs to borrow for a year, and that would be the maturity of the loan from Second National. What would be the maturity of the money-market alternative? What would Soporifics have to do? Why might this be a problem? What could Soporics do to address the problem? Maturity would be between 2-6 weeks (below 270 days to avoid cost of registration with the SEC). o Soporifics would roll over its issues – issue new paper to pay off the old. o Can be a problem if there is disruption to the market resulting in lenders wanting their money NOW without rolling over – if Soporific does not have money on hand, can default because of lack of liquidity but not because of insolvency. Soporific would need a lot of backup liquidity to prevent this from occurring. o standby line of credit from bank Soporific could use privately placed paper (market for master notes).
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o privately placed short term debt, usually 6-9 months. continuing relationship with lender avoids the issuing costs of rolling over public paper and allows tailoring of the terms and periodic renegotiation. c. How would Second National feel about losing business to the different alternatives? How does this depend on the creditworthiness of the borrower? How could Second National profit from the loss of a borrower? Second National would not be happy about losing its income from loans to others including securities dealers and underwriters The borrower still needs good enough credit to borrow through issuing commercial paper, including master notes, so borrowers with low credit will still have no choice but to borrow using a bank loan this is like adverse selection o They could get involved in the money market through charging fees for banker’s acceptances where they guarantee if aware of adverse selection, can charge higher interest rates. also less credit worthy borrowers who still pay back are more profitable for banks than totally credit worthy borrowers. 2 sources of profit: risk premium and term premium (term premium bc lending long term, borrowing short term and bearing interest rate risk) short term loan so not a lot of term premium. company is not very risky so low risk premium. so not much to be lost from loss of short term loan to safe company.
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