Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 386

Soothe bondholder fears

! There are some firms that face skepticism from bondholders when they go out

to raise debt, because

• Of their past history of defaults or other actions


• They are small firms without any borrowing history
  ! Bondholders tend to demand much higher interest rates from these firms to
  reflect these concerns.

Fcoancfltoirct (^) si nb aetgweneceyn stock
and bond holders
Obyb sLerevndaberislity of Cash Flows

• l (^) eLade stso ombsoerrev acbolne (^) flcicastsh flows
  T- yTapne (^) goibf Ale sasnedts l fiiqnuaindc aesdsets
  create less agency problems -E^ Rxeisstitrnigc^ tiDoenbst^ ocon^ vFeinnaanntscing
  If agency problems are substantial, consider issuing convertible bonds
  PCounttavbelrte ibBiloensds
  Rating SNotesensitive
  LYONs

While adding these conditions to debt may make it less attractive to the firm, it

may be only way they can borrow.