A US listed company, ABC, is considering raising debt financing for 5 years in US dollar for an acquisition of a tech firm that is expected to add more business diversity to ABC and will increase overall earnings by 50%. Recently, ABC had a bad fall in earnings on the last annual reporting and the solvency ratios are deteriorating. However, ABC's credit rating has not been downgraded but the credit rating agencies (Moody & S&P) have already put a negative" view on ABC's outlook. Therefore, the success of this acquisition is crucial to ABC The interest rate environment (yield curve) is currently mildy upwards at a low interest rate across the whole curve due to government stimulus measure mostly through monetary policy. With the increasing number of countries receiving vaccines, the hope of global normality is within sight and economic recovery would be expected in early next year. The interest rate market will then be expected to rise to resume normal economic level. Equity investors are starting to focus investment on potential attractive company earnings and sentiment is very positive. ABC's Chief Financial Officer (CFO) is contemplating the following options of issuance: (a) Callable Bond (b) Fixed Coupon Bond (c) Fixed Coupon Bond cum equity warrants (d) Convertible Bond The CFO seeks an investment banking advisor for issuance recommendation for a second opinion. Discuss each of the financing options in the light of investors' demand and issuer's cost perspective, explain what would be the possible choices of issuance that the advisor would be advising? (20 Marks) A US listed company, ABC, is considering raising debt financing for 5 years in US dollar for an acquisition of a tech firm that is expected to add more business diversity to ABC and will increase overall earnings by 50%. Recently, ABC had a bad fall in earnings on the last annual reporting and the solvency ratios are deteriorating. However, ABC's credit rating has not been downgraded but the credit rating agencies (Moody & S&P) have already put a negative" view on ABC's outlook. Therefore, the success of this acquisition is crucial to ABC The interest rate environment (yield curve) is currently mildy upwards at a low interest rate across the whole curve due to government stimulus measure mostly through monetary policy. With the increasing number of countries receiving vaccines, the hope of global normality is within sight and economic recovery would be expected in early next year. The interest rate market will then be expected to rise to resume normal economic level. Equity investors are starting to focus investment on potential attractive company earnings and sentiment is very positive. ABC's Chief Financial Officer (CFO) is contemplating the following options of issuance: (a) Callable Bond (b) Fixed Coupon Bond (c) Fixed Coupon Bond cum equity warrants (d) Convertible Bond The CFO seeks an investment banking advisor for issuance recommendation for a second opinion. Discuss each of the financing options in the light of investors' demand and issuer's cost perspective, explain what would be the possible choices of issuance that the advisor would be advising? (20 Marks)
