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Issuing Long-Term Debt & Shelf Registration

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Issuing long term debt in the form of bonds requires the assistance of an underwriter. Let's briefly review the issuing process as well as the flexibility offered by shelf registration.

Issuing Long Term Debt

Lee is the Chief Financial Officer (CFO) for a growing technology company that is exploring long term debt options as a way to raise money for its next big project. In layman's terms we are talking about bonds; the company borrows money from bondholders and pays them a specific amount of interest periodically. Let's look in on his initial research of how long term debt, such as bonds, are issued, as well as the prospect of using shelf registration as one possible strategy.

Bond Creation

In his role as the CFO, Lee determines that the company needs to raise $10 million to fund its project and intends to finance it with long-term debt. Lee finds an underwriter to make the bond creation happen. The underwriter is an investment bank that creates the bonds in consultation with Lee's company. Underwriters assist the company in determining how the bonds are to be priced, which considers not only the interest rate paid out on the bond but also the price of an individual bond and any purchase increments or minimums. The underwriter purchases the bonds from Lee's company and then proceeds to resell them publicly or privately to institutions and individual investors.

Bond creation, or issue, can take one of three forms. Lee might seek competitive bids from multiple underwriters, negotiate a deal with a specific underwriter, or work with an underwriter to sell bonds directly to private institutions rather than the general public. Underwriters can earn a fee from the company for issuing the bond and earn an additional profit from marking up the price when the bonds are resold to investors.

Lee's bonds can be issued at a variety of different coupon, or interest, price points. A par price means the bond is initially sold at market rates. In this case, the par value of an individual bond is $1,000. Discount bonds sell at a price below the stated par value because the interest rate offered is below market value, such as selling a $1,000 bond for $990. Likewise, a premium bond sells at a price greater than the par value because it offers an above market interest rate.

Shelf Registration

There's one little problem for Lee. The CEO and the board of directors are interested in the project, but not fully committed right now because of uncertainty in the market. Once his superiors make up their mind though, they will want to proceed with a bond issue as soon as possible. A shelf registration makes it possible to proceed with the planning and be ready to move quickly to a bond issue.

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