14: Long-Term Debt and LeasingTABLE 14.1 CHARACTERISTICS AND PRIORITY OF LENDER’S CLAIMS OF TRADITIONAL TYPES OF BONDSBond type Characteristics Priority of lender’s claim
Debentures Bonds that only creditworthy companies
can issue; usually secured over property.Seniority is the same as that of any general creditor. May have
other secured bonds subordinate to them.
Subordinated bonds Claims are not satisfied until those of the
creditors holding senior debts have been
fully satisfied.Claim is that of a general creditor, but not as high as a senior
debt claim.Income bonds Income bonds are a type of life insurance
policy only friendly societies issue.Seniority is that of a general creditor. Regular bonuses issued
to lenders.
Covered bonds Secured by a direct claim on assets that
are owned by the issuer.Rank with unsecured debt of borrower.A popular type of short-term debt in Australia is the bank-accepted commercial bill. This is a discount
bill – that is, it pays no interest and has to sell for less than the face value (which is payable at a
specified maturity date in the future). There are three parties to this bill: the drawer, who issues the
bill; the acceptor, who undertakes to pay the face value when the bill is presented at the maturity
date (the acceptor is typically a bank); and the payee, who is the party that receives the borrowed funds
(the payee is also usually the drawer).
A debenture issued by an Australian company in Australia is a fixed interest rate investment, whereas
some other sorts of corporate bonds may have floating rates, with their coupon rates being adjusted on a
regular basis against some index such as the London Interbank Offer Rate (LIBOR).
Subordinated bonds are those that are junior to senior bonds: creditors’ claims on subordinated bonds
are not satisfied until the senior bondholders’ claims have been fully satisfied.
There are some other categories of bonds available in the Australian capital markets. For example,
income bonds are a type of life insurance policy only friendly societies issue. They are sometimes marketed
as ‘bonus bonds’ or ‘savings bonds’.
Unlike other life insurance policies, which pay bonuses on maturity or surrender, an income bond is
like a savings investment account, and distributes regular bonuses.
From 2012, Australian banks have been allowed to issue covered bonds. These bonds are direct,
unconditional obligations of the issuer. In the event of issuer insolvency or default, investors are entitled
to be repaid from the pool of cover assets, and they have a claim on the issuer – one subordinate to that
of statutorily protected depositors of the bank, but on the same footing as that of unsecured creditors.
The cover assets are held in a bankruptcy remote special purpose entity, the guarantor, which provides an
unconditional and irrevocable guarantee of the issuer’s obligations under the covered bonds. A security
trustee holds security over the cover pool assets for the benefit of covered bondholders and service
providers.
Over the years, corporations have developed many new debt instruments designed to attract a unique
clientele of bond investors who, it is presumed, would be willing to pay a higher price for a given special
feature. A detailed discussion of these new offerings is beyond the scope of an overview chapter, but
Table 14.2 surveys the characteristics of a few of them.
bank-accepted
commercial bill
A short-term bond issued at a
discount by a company, paying
no interest but repayment of
the face value at maturity,
with bank supportdebentures
Bonds backed by a claim over
tangible propertysubordinated bond
A secured bond on which
the creditors’ claims are
not satisfied until the senior
bondholders’ claims have
been fully satisfied
income bonds
A type of life insurance
policy only friendly societies
issue. They are like a savings
investment account, and
distribute regular bonuses to
the lenders
covered bonds
These bonds are direct,
unconditional obligations of
the issuer. In Australia, they
were issued for the first time
in 2012, by banks