3 QUESTIONS BELOW -- Reference Bond Financing

Alternative #3 Private Placement Citibank is in contact with a major pension fund that was seeking to invest money privately instead of buying publicly traded bonds. Long term loans that are made by pension plans, life insurance companies and closed end mutual funds are called private placements. For investors they have several advantages. First, because they do not trade publicly they are not marked to market as publicly traded bonds are. Only if interest rates change drastically or if the borrower gets into financial trouble are the bonds re-evaluated. That means that most of the time the reported value of a portfolio of private placements does not fluctuate. Second, private placements can be tailored to the needs of the investor. This is particularly useful for pension plans who can easily meet immediate cash outflow needs but struggle to find investment opportunities that pay large cash flows far into the future when they need them to meet their pension obligations. Third, the private placement investor is privy to more information about the companys financial condition and strategic position than the general public. Companies are allowed to provide them with information that they withhold from the public Companies with strategies or resources that they would prefer to keep secret often choose this alternative for that reason.

Private placements have some benefits for the borrower. First the borrower needs only to report the borrowing on its financial statements. The details of the borrowing can be kept secret. If the investor insists on protective covenants (e.g. minimum EBITDA coverage) these covenants and the companys compliance with them are known only to the company and the investor. Secondly, publicly traded securities entail a significant legal expense to comply with the reporting requirements of the Securities Exchange Commission. Issuing a public bond can be a lengthy, costly process. Private placements are fast.

For these reason Maurine Stewart is amenable to the suggestion by the Citibank people that she investigate the private placement market. Indeed, Citibanks customer is prepared to invest a sizable sum as soon as it can access and analyze W F Princes financial statements and other data about the firm. But there is a rub. The pension plan wants unconventionally small cash payments during the life of the contract and then be compensated by a larger final cash flow when the loan matures. The pension plan makes it clear that it expects an overall yield to maturity of 7.25% which seems a little on the high side but still within the realm of reason. But it wants the private placement to have a face value not of $50 million but of $60 million instead. In this case face value refers to the redemption amount not to the initial amount lent by the investor. The amount actually lent by the investor would be the present value of all the cash flows the investor receives discounted at 7.25% compounded semiannually. The coupon rate would be 5.50% and the maturity would be twelve years. In addition, the pension plan produces a document 90 pages long with the details of the covenant to be agreed to by the company including minimum coverage ratios and other restrictions. But, because the private placement is less work and less risky to the investment banker the flotation fee is only 2.00%.

To summarize, Data Relevant to the Private Placement Alternative a. Maturity Fourteen years b. Face Value $60,000,000 (the redemption amount) c. Price to Investors The present value of the coupon cash flows and the $60,000,000 discounted at 7.25% compounded semi-annually d. Yield to Maturity 7.25% e. Coupon rate 5.50% f. Flotation Fee 2.00% g. Proceeds to W. F. Prince 98% of the money that the Pension Plan pays up front

Q10. How much money will the pension plan pay up front? (If you are using the bond calculator you can use $60,000,000 just as you use $1,000 or $100 to get an answer).

Q11. What will the proceeds be to W.F. Prince after the 2% flotation fee? Please note that the flotation fee is deducted from the money the investment banker raises in the market - not - the face amount of debt that the issuer ends up owing to the investor.

Q12. What will the interest rate cost of financing through this private placement be?