Junk Bonds & Bridge Loans Presentation[1]

8/8/2019 Junk Bonds & Bridge Loans Presentation[1]

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JUNK BONDS

AND

BRIDGE LOANS

Advait Bhalkar 65

Sunil Kinger 87Mayuresh Patil 97

Sagar Pawar 101

Ashish Telang 118


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JUNK BONDS


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Junk bonds are technically similar to regular

bonds.

The only difference is the Credit Quality ofits issuer.

Rated BB or below due to high default risk.

Also known as High Yield Bonds orSpeculative Bonds.

WHAT ARE JUNK BONDS?

Standard & Poor's Moody's Fitch Grade Risk

AAA Aaa AAA Investment Low

AA Aa AA InvestmentLow

A A A

Investment Medium

BBB Baa BBBInvestment Medium

BB Ba BBJunk

High

B B BJunk

High

CCC Caa CCCJunk

High

CC Ca -Junk

High

C - -Junk

High

D C DDD, DD, DJunk Default


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CHARACTERISTICS OF JUNK BONDS

Yield on Junk Bonds is generally 4-6% aboveTreasuries.

The value is affected to a greater extent than theinvestment grade bonds, by the possibility ofdefault.

They respond to the market conditions fasterthan the regular bonds.


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WHO ISSUES JUNK BONDS?

Fallen Angels Companies which were previouslyinvestment grade but have lost their credit quality.

Rising Star Companies whose credit quality isimproving and are on their way to becoming aninvestment grade.

Companies which are emerging from bankruptcy.

Mergers and Acquisitions, LBOs.


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WHO BUYS JUNK BONDS?

Individual investors with high risk appetite.

Institutional investors.

Fund managers as a tool for diversifying theportfolio.

Life Insurance Companies.

Pension funds.


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BENEFITS OF JUNK BONDS Junks Bonds help the emerging companies to raise capital.

High-yield bonds do not correlate exactly with eitherinvestment-grade bonds or stocks.

During upmarket conditions they are capable of providinghigher returns than regular bonds.

They act as a very important tool for diversifying the

investment portfolio.

From the investor's viewpoint, high-yield bonds provideboth income and potential for capital gains.


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JUNK BOND MARKET IN INDIA SEBI allowed investments in Junk Bonds in December

2007.

But this market has still not grown in India because of the

Low Risk Appetite.

Assistance for floating Junk Bonds is required from

market makers.

Proper regulation for junk bond markets is necessary.

Creating of a strong investor base.


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MARKET BEHAVIOR OF JUNK BONDS

In general, secondary market bond prices move inthe opposite direction of interest rates. However,

junk bonds are less affected by interest rates than

are other bonds.

The market behavior of junk bonds is more intune with overall changes in the economy, such

as a recession.

Junk bonds tend to act more like stocks in their

market behavior than other bonds.


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BRIDGE LOANS


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DEFINITION A short-term loan intended to provide or extend

financing until a more permanent arrangement is made.

Typically taken out for a period of 2 weeks to 3 yearsand no fixed payoff date.

More expensive high interest rates (1215%).

Backed by some form of collateral such as real estate or

inventory.

Loan-to-value (LTV) ratios generally do not exceed 65%for commercial properties, or 80% for residential

properties, based on appraised value.


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TYPES OF BRIDGE LOANS

Closed Bridging Loans-A closed bridge is where

all terms and conditions of both sale and

purchase on both properties have been agreed.

Open Bridging Loans-terms have not yet been

agreed on selling one property but you are still

determined that you want to go ahead with thepurchase of the second property.


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CONTD.

FirstCharge Bridging Loans- A first charge

bridging loan will replace any outstanding

Mortgage and will have a First Charge on your

property.

Secondand ThirdCharge Bridging Loans-if one

has already taken a loan against a property andthat there is sufficient equity in the property we

can lend on a 2nd or even a 3rd charge basis.


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WHO ARE THE LENDERS OF BRIDGE LOANS?

Most banks do not offer real estate bridge loans

because the speculative nature, risk, lack of full

documentation, and other factors, do not fit the

bank's lending criteria.

Bridge loans are therefore more likely to come

from individuals, investment pools, andbusinesses that make a practice of the higher-

interest loans.


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USES OF BRIDGE LOANS

In Business

1. When one partner wishestoleavewhile anotherwishes to continue the business.

Bridge loan can be used until long term finance ismade available.

2. In corporate finance, bridge loan can be used for

interim financing covering the time lag betweenredemption ofa bondor commercial paper issueand replacing it with a new one.


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CONTD

3. To carry distressedcompanieswhile searching

for an acquirer or larger investor.

4. As a final debt financing to carry the company

through the immediate period before an initial

publicoffering.


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CONTD

By Developers

A bridge loan is obtained by developers to carry a

project while permit approval is sought.

Once the project is fully entitled, it becomes

eligible for long term loans from more

conventional sources that are at lower-interestand in a greater amount


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CONTD

By Real Estate (Home) buyers

Individual wants to buy new home(property) by sellingold home(property) but cant wait till old home getssold.

Bridge loan can be used here which will pay off themortgage on the borrowers existing home and make adown payment on the new home.

Borrower repays the bridge loan when the old homesells and can opt for long term finance from convenientlender for new home.


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BENEFITS

Short term working capitalfinancing can be done bybridge loan without affectingthe business operations.

Allows to Buy another houseor business property withoutselling your current home or

office first.

No Initial payments on thebridge loan.

DRAWBACKS

Very risky, high interest

rates.

Risk of old property notgetting sold.


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TH

ANK YOU

Documents

Junk Bonds & Bridge Loans Presentation[1]