MINICASE Financing S&S Air's Expansion Plans with a Bond Issue Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have. Although Chris is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isn't sure how each feature would affect the coupon rate of the bond issue. You are Renata's assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature. QUESTIONS 1. The security of the bondthat is, whether the bond has collateral. 2. The seniority of the bond. 3. The presence of a sinking fund. 4. A call provision with specified call dates and call prices. 5. A deferred call accompanying the call provision. 6. A make-whole call provision. 7. Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider. 8. Any negative covenants. Also, discuss several possible negative covenants S&S Air might consider. 9. A conversion feature (note that S&S Air is not a publicly traded company). 10. A floating-rate coupon. There is no universally agreed-upon distinction between short-term and long-term debt. In addition, people often refer to intermediate-term debt, which has a maturity of more than 1 year and less than 3 to 5, or even 10, years. 2The word funding is part of the jargon of finance. It generally refers to the long term. A firm planning to "fund its debt requirements may be replacing short-term debt with long-term debt. 3The words loan agreement or loan contract are usually used for privately placed debt and term loans. 4Real property includes land and things "affixed thereto." It does not include cash or inventories. 5A bond issued with a very low coupon rate (as opposed to a zero coupon rate) is an original-issue discount (OID) bond. The way accrued interest is calculated actually depends on the type of bond being quotedfor example, Treasury or corporate. The difference has to do with exactly how the fractional coupon period is calculated. In our example here, we implicitly treated the months as having exactly the same length (30 days each, 360 days in a year), which is consistent with the way corporate bonds are quoted. In contrast, for Treasury bonds, actual day counts are used. In days of old, the interest rate risk premium was called a "liquidity" premium. Today, the term liquidity premium has an altogether different meaning, which we explore in our next section. Also, the interest rate risk premium is sometimes called a maturity risk premium. Our terminology is consistent with the modern view of the term structure
