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A non-investment grade company wants to borrow money. It is considering two options: (i) issuing a...

A non-investment grade company wants to borrow money. It is considering two options: (i) issuing a 144a high-yield bond, or (ii) issuing a leveraged loan. The company is certain that interest rates will fall drastically next year. With this in mind, which form of debt would be most favorable and why? Why would the other form of debt be less favorable? (6 points)

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Answer #1

Here as we know the company already has high debt and not in the investment grade thus if it goes for leveraged loan the interest rate would be very high and constant. So if the company goes for the leveraged loan then it may not be able to get the benefit of falling rate.

If the Company goes for the 144a high yield bonds then they can attract buyers (QIB) and also when rate decreases they can effectively lower their cost of borrowing. Thus it would be better to issue a 144a high-yield bond rather than going for the leveraged loan.

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