Unsecured debt

An originator with 100 million of imsecured debt, bearing an interest rate of X percent, plans to repay 50 million of this unsecured debt with the proceeds of a new 50 million issuance of secured debt. The principle of exposure conservation states that the interest rate on the secured debt will be reduced to X-Y percent, but this reduction in rate will be matched by an interest rate increase on the remaining unsecured debt to X+Y percent. This analysis assumes that the unsecured creditors are free to adjust to a market rate. Therefore, according to the theory, the originator makes no net gain from granting security. 

If this originator repaid the 50 million of the unsecured debt from the proceeds of a securitization, instead of from the issuance of secured debt, the interest rate on the remaining unsecured debt would again rise to X+Y percent. However,... 

All in all, the secured nature of this type of product strongly reduces the loss potential in a default scenario and to date, since their inception back in 1869, no Cedulas Hipotecarias has ever defaulted. In Moody s opinion these factors justify a rating of two notches above the senior unsecured debt rating for the issuer. 

If the company has issued secured debt, this will rank above senior and subordinated unsecured debt. 

Net worth statements have common categories of assets and debts. Debts are generally divided into two categories secured and unsecured. Assets are generally divided into the following categories ... 

Most debt capital is raised by issuing long-term bonds. A mortgage is a bond that is backed by pledging a specific real asset as security against the loan. An unsecured bond is called a debenture. The ratio of total debt divided by total assets is known as the debt ratio (DR) or leverage of the company. 

The basic statement of MM with respect to the capital structure can be transferred to the structure of a company s debt the mixture of short- and long-term liabilities, secured and unsecured, subordinated and unsubordinated debt is irrelevant, too. 

Terms and Conditions of the bonds (the Ts Cs ) which are the most negotiated terms are usually those dealing with the negative pledge, which is a commitment by the issuer not to create a security interest senior to the bond over any collateral or not to issue debt senior to the bond, in the case of unsecured bonds description of the interest payable and redemption amount early redemptions (e.g., for tax reasons, puts and calls) withholding taxes and events of default. If the bond is part of a repackaging or a structured bond, the Ts Cs will also include a summary of the terms under which the security created for the benefit of the noteholders will be realised. 

For specialized credit card banks, particularly in the United States, the ABS market has become the primary vehicle to fund the substantial volume of unsecured credit loans to consumers. Credit card pools are differentiated from other types of ABS in that loans have no predetermined term. A single obligors credit card debt is often no more than six months, so the structure has to differ from other ABS in that repayment speed needs to be controlled either through scheduled amortization or the inclusion of a revolving period (where principal collections are used to purchase additional receivables). 

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