Investment-grade issues

Eurobond documentation for investment-grade issues is reasonably standardized, although the wording of some terms and conditions has varied over time. We list the key terms and conditions below. (Sterling issuers offer additional protection in some instances, as discussed separately.)... 

Companies whose debt securities are rated "investment grade" can usually issue securities in the capital markets at interest rates competitive with, or even lower than, other generally available sources of funds, such as bank loans. The higher the company s rating within the investment grade categories, the lower the company s cost of funds. This reduced cost is a result of the lower interest rate necessary to induce investors to buy the company s securities. ... 

Insurance companies are limited, for example, in the amount of new insurance policies they may issue by the amount of their eligible investments, which are usually defined as securities rated at least investment grade, and other eligible assets. For the "biuk " provision of the NY Insurance Code, see N.Y. Ins. Law 1404 (b) (Consol. 1993). 

Credit-linked notes are hybrid securities, generally issued by an investment-grade entity, that combine a credit derivative with a vanilla bond. Like a vanilla bond, a standard CLN has a fixed maturity structure and pays regular coupons. Unlike bonds, all CLNs, standard or not, link then-returns to an underlying asset s credit-related performance, as well as to the performance of the issuing entity. The issuer, for instance, is usually permitted to decrease the principal amount if a credit event occurs. Say a credit card issuer wants to fond its credit card loan portfolio by issuing debt. To reduce its credit risk, it floats a 2-year credit-linked note. The note has a face value of 100 and pays a coupon of 7.50 percent, which is 200 basis points above the 2-year benchmark. If more than 10 percent of its cardholders are delinquent in making payments, however, the note s redemption payment will be reduced to 85 for every 100 of face value. The credit card issuer has in effect purchased a credit option that lowers its liability should it suffer a specified credit event—in this case, an above-expected incidence of bad debts. 

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