This is an extract of our Sinking Funds document, which we sell as part of our Corporate Bonds and Credit Agreement Outlines collection written by the top tier of NYU School Of Law students.
The following is a more accessble plain text extract of the PDF sample above, taken from our Corporate Bonds and Credit Agreement Outlines. Due to the challenges of extracting text from PDFs, it will have odd formatting:
02D. #4 Sinking Funds
Model Simplified Indenture, Section 3.01-3.06, Exhibit A, Section 6
Northwest Note Agreement, Section 8.1, 8.3, 8.5-Sinking Fund = a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset 3 elements in public bonds
Requirement to redeem certain amounts prior to maturity
Principal repayment is distributed throughout the year overtime the principal amount declines, by the time the principal is due, less is owed
Right to redeem that amount at par
Usually redemption is at a premium
Right to use bonds purchased in market/ previously redeemed or converted to satisfy requirement
Use other bonds to repay, those bonds might be unconvertible
Economics of choice between options for satisfying requirements
You get money back earlier shorter loan usually carries less risk
But the option to redeem is more valuable to the company than the bondholder
Company have option (not requirement) to redeem in par/ repurchase company would
1. redeem at par when purchase price is higher than par
2. repurchase when the purchase price is lower than par
Company would only exercise option when it is beneficial to the company
Procedure (notice etc.) same as for optional redemption
Problem Set 4
Consider the Model Simplified Indenture - Section 3.01-3.06, Exhibit A, Section 6
Assume that $100 million of Debentures have been issued by MSI under the MSI Indenture and that the first sentence of §6 of the Debentures reads "The Company will redeem $10 million principal amount of the Securities on June 1, 1995 and on each June 1 thereafter through June 1, 2004…"
On April 20, 1994, the Company repurchases $15 million of Securities. On May 20, 1994, the Company redeems $25 million of Securities pursuant to §5 of the Securities. No securities have been converted or delivered to the Trustee for cancellation.
1. What are the Company's options with respect to the mandatory redemption requirement on
June 1, 1995? How would you advise the Company?Kahan: It could redeem bonds at par or use bonds repurchased or previously redeemed to satisfy the sinking fund requirement. The company should redeem bonds at par if the value of these bonds (if unredeemed) is above par.Exhibit A, section 6: Mandatory Redemption "The Company will redeem
$_____ principal amount of the Securities' on ____ and on each ___ thereafter through ______ at a redemption price of 100% of principal amount, plus accrued interest to the redemption date… The Company may reduce the principal amount of Securities to be redeemed pursuant to this paragraph by subtracting 100% of the principal amount (excluding premium) of any 1
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