junk bond

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junk bond,

a bondbond,
in finance, usually a formal certificate of indebtedness issued in writing by governments or business corporations in return for loans. It bears interest and promises to pay a certain sum of money to the holder after a definite period, usually 10 to 20 years.
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 that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. Junk bonds became a common means for raising business capital in the 1980s, when they were used to help finance the purchase of companies, especially by leveraged buyoutsleveraged buyout,
the takeover of a company, financed by borrowed funds. Often, the target company's assets are used as security for the loans acquired to finance the purchase.
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; the sale of junk bonds continued to be used in the 1990s to generate capital. See also Milken, MichaelMilken, Michael Robert
, 1946–, American financial executive, b. Van Nuys, Calif. Nicknamed the "junk bond king," he was an executive at Drexel Burnham Lambert, Inc., where he transformed corporate takeovers and financing by the use of high-yield junk bonds.
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References in periodicals archive ?
In economic terms, the mezzanine debt was secured by real property because the only assets held by the Owner LLC were the property and related personal property, and by "stepping into the shoes" of the Owner LLC upon a default, the creditor would acquire full control of and an equity interest in the property.
However, the FT reported that ICG Capital had sold its share of pounds 540m of mezzanine debts for around 70 per cent of face value in a process handled by Goldman Sachs.
The theme of the seminar was 'Real Estate Mezzanine Debt: An Historic Investment Opportunity'.
"We have contracted with NEL to deliver this commercially into the market place with the objective of full recovery of our investment through a combination of repayment and profits made on the equity options." Barrie Hensby, chief executive of NEL, which was established in 1989 as an independent private company to manage regional equity and loan funds focussed on plugging the 'equity gap', said mezzanine debt finance was an area of significant growth in the North-east.
The Community Investment Mezzanine Fund LP, a partnership between RCG Longview and Fannie Mae, funded the mezzanine debt. The 78.5 percent loan-to-value ratio (LTV) financing has a seven-year term with interest-only payments for the first five years, followed by a 30-year amortization.
Subordinated/Mezzanine Debt Advantages Disadvantages Senior Debt Cheapest form of financing May not cover entire No loss of ownership financing need Interest is tax deductible Least amount of Most readily available operational flexibility source of capital Must be secured, potentially with a personal guarantee Subordinated/ Less (or zero) loss of More expensive than Mezzanine Debt ownership than equity senior debt Takes the form of equity Will restrict cash but is less expensive positions and may Involvement of mezzanine result in warrant financiers as objective positions counsel Financial disciplines Typically does not and controls imposed amortize, providing incremental cash flow.
Nelson Carbonell, chairman and CEO of Snowbird Capital in Reston, Va., a mezzanine debt lender, says mezzanine debt and second-lien loans can compete with each on the balance sheet--but he believes mezzanine is superior for lenders.
Senior debt financing was led by BNP Paribas with mezzanine debt provided by Gleacher Mezzanine LLC and York Street Capital Partners.
On the positive side, mezzanine financing allows a company to add term debt beyond what is acceptable to most major banks; as debt, it is less dilutive to the existing shareholders, allowing them to retain greater control over and ownership of their companies; including mezzanine debt can greatly reduce the overall cost of capital and permits existing shareholders to retain more of the up side as compared to pure equity; and lastly, mezzanine debt is considered "self liquidating," as it is structured to allow the investee company to retire the debt over a term, and sometimes earlier if performance exceeds expectations.
Lured by attractive returns and more transparent reporting, opportunity funds, pension funds and insurance firms will increase their investments in real estate the second half of 2003, targeting equity plays and mezzanine debt, according to Stan Ross, chairman of the board of the University of Southern California Lusk Center for Real Estate.
In spite of its recent growth, subordinated or mezzanine debt is an often used and frequently misunderstood term in corporate finance.