Analyzing Debt Footnotes Headquartered in Montreal, Canada, Valeant Pharmaceuticals International Inc. is a multinational specialty pharmaceutical company that develops and markets prescription and non-prescription pharmaceuticals, principally in the areas of dermatology and neurology. The company is the largest pharmaceutical company in Canada with a portfolio of more than 500 products and 400 employees involved in R&D activities. The company is listed on both the NYSE and the Toronto Stock Exchange. Its 2015 income statement reported the following line item.

$ millions 2015 2014 2013 Loss of extinguishment on debt. . . . . . . . . . . . . . . . . . . . . . $20.0 $129.6 $65.0 Required

a. What is a loss on extinguishment of debt? Why does such a loss arise?

b. How does the company calculate the loss on extinguishment of debt?

c. Would we categorize this income statement item as operating or nonoperating?

D7-56. Coupon Rate versus Effective Rate Assume that you are the CFO of a company that intends to issue bonds to finance a new manufacturing facility. A subordinate suggests lowering the coupon rate on the bond to lower interest expense and to increase the profitability of your company. Is the rationale for this suggestion a good one? Explain.
D7-57. Ethics and Governance: Bond Covenants Because lenders do not have voting rights like shareholders do, they often reduce their risk by invoking various bond covenants that restrict the company’s operating, financing and investing activities. For example, debt covenants often restrict the amount of debt that the company can issue (in relation to its equity) and impose operating restrictions (such as the ability to acquire other companies or to pay dividends). Failure to abide by these restrictions can have serious consequences, including forcing the company into bankruptcy and potential liquidation. Assume that you are on the board of directors of a company that issues bonds with such restrictions. What safeguards can you identify to ensure compliance with those restrictions?