Bond Rating for A Bond Issue - Accounting and Finance Assignment Help

Assignment Task

Question 1.

Globally, the bond market serves as the primary channel for debt funding of large corporations and government bodies. In Australia, however, the corporate bond market is rather ‘thin’ and the market for government bonds has been of decreasing relevance in recent times.

You have recently commenced employment with ACE Agricultural Construction Enterprises Ltd, a medium to large listed company, which has had typical long-term debt requirements of between $20 and $40 million p.a.  However, expected growth in projects, due to reconstruction programs in the wake of the COVID-19, is anticipated to push long-term debt funding needs up to $60 to $80 million p.a. for a number of years to come.

ACE presently relies mainly on bank term loans for its debt funding. Usually it chooses to borrow for a 5-year term. The company’s bankers, a subsidiary of the German group B.A.N. Krupps, are presently willing to advance 5-year term loans to ACE at an interest rate of 2.82% p.a. APR, to a maximum amount of $100 million in the coming year, repayable at the end of each month, provided the company offers suitable security.  

Required:

1)  Explain briefly why the ACE would mostly likely need a bond rating for a bond issue?

2) Consider the relative cost of the bonds as opposed to the bank loan. Assume that there are no issue costs for the bonds.  what would be the better option for ACE? (show all supporting calculations) 

3) Assume that the issue costs of the bonds are $0.3 million, what would be the better option for ACE among the options of issuing bonds and the bank loan? (show all supporting calculations)

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