KIS 채권평가 - Beyond Pricing

KOR

Alternative Product Pricing

Mezzanine Finance

Introduction Pricing Model

Concept

Mezzanine

means lounge between first and second floor in Italian

Mezzanine Finance
  • Hybrid security between senior debt and equity
  • Includes CB, BW, RCPS etc
Issuers' perspective
  • low credit rating companies can access funds with low interest cost
  • upon conversion, companies can benefit from improved financial structure through decreased debt and increased capital
investors' perspective
  • Stable interest payment guaranteed, although slightly lower than plain bond
  • For companies with high growth potential, higher return through conversion possible
Risk-Return Profile of Mezzanine Finance
inform of Risk-Return Profile of Mezzanine Finance

Characteristics of financing methods

inform of Classification(Profit Structure, General Form, Economic/Legal characteristic, Dilution risk, Collateral, Financing cost), Senior Debt, Mezzanine, Equity
Classification Senior Debt Mezzanine Equity
Profit Structure Interest Interest + performance compensation performance compensation
General Form Bond Convertible Bond Stock
Economic/Legal characteristic Debt/Debt Capital/Debt Capital/Capital
Dilution risk N/A Low High
Collateral Yes Collateral No Collateral No Collateral
Financing cost Low Intermediate High

Hybrid Bond

inform of Classification(Conversion right classification, converted asset, cash inflow upon exercise, continuation of bond upon conversion, Separate transaction of conversion rights, Effect on financial structure, Common stock acquisition cost, when voting right is granted, coupon rate), CB, BW, EB
Classification CB BW EB
Conversion right classification Conversion Right Warrant Exchange Right
converted asset newly issued common stock(issuing company) newly issued common stock(issuing company)) company owned common stock(including own stock)
cash inflow upon exercise no new fund new fund (not if alternative payment (put option) exsits) no new fund
continuation of bond upon conversion No Yes (if alternative payment no) No
Separate transaction of conversion rights Not possible Bond and Warrant can be traded separately.
Effect on financial structure Principal and Interest repayment obligation disappears upon exercise(decreased debt, increased capital) Principal and Interest repayment obligation disappears upon exercise(decreased debt, increased capital) Principal and Interest repayment obligation disappears upon exercise(decreased debt, increased capital)
Common stock acquisition cost Conversion price exercise price exchange price
when voting right is granted when conversion right exercised when exercise payment is paid when exchange right is exercised
EB < CB < BW < Corporate Bond
coupon rate
  • BW requires additional funds to exercise conversion rights. -> disadvantageous to investors and often pays higher coupon
  • EB, unlike CB/BW does not issue new shares -> lower dilution risk for EB and EB often pays lower coupon
Limitation SITEMAP KOR
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