Tuxedo Air Company Analysis Paper Example

Paper Type:  Case study
Pages:  7
Wordcount:  1760 Words
Date:  2022-09-22

Define the Problem

Focusing at the general performance of the company, it is important to note that the ratio analysis of Tuxedo Air had the history of little planning for managing the company investment needs. Due to such long term challenge, Tuxedo air experienced some problematic times as a result of lack of proper cash flow into the company. Due to inadequate planning, the end result was missed sales which affected the company broadly Jack and Mark were not cable of drawing salaries during this period. In order to bring this to an end, the top management would like to put in place a good financial plan to the coming years to that it would be possible for the company to start addressing the outside investment requirement

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Security of the bond

Focusing on the performance of the company and their next decision, it is important to note that collateral reduces a security's risk and affect its return, this has hence affected the bond performance of Tuxedo air. Notably, the more risk an investment has, the more investors expect to be compensated for taking such a risk. Tuxedo air should work on bringing its investment in order since the higher the quality of the collateral, the better its credit rating and the lower its return. Corporate bonds with collateral will generally have lower coupon rates than non-collateralized corporate bonds. Adding collateral to a security makes it more desirable to own. By using a pledged asset to guarantee repayment of a security's debt, an investor needs not to worry about his or her investment defaulting. However, there is a trade-off in the yields of corporate securities backed by collateral. Collateralized Securities have higher credit ratings than those without collateral. The higher the credit rating, the less likely the issuer of the security is to default. Notably, a bond with collateral will at one point experience lower coupon rate, with bondholders having their general claim on the collateral and even when the company is in the state of bankruptcy. Collateral always offers an asset that bondholders can claim which hence lower their risk in the time of default. Generally, the negative side of collateral is that Tuxedo Air generally is not in the position of selling the asset that has been used as collateral hence this will make them to generally have to keep the company asset in an efficient working environment.

The seniority of the bond Seniority of Bond

It is important to note that the more senior the bond, the lower the rate of coupon. In most cases, senior bonds get full payment during bankruptcy proceedings before subordinated bonds receive any payment. A significant challenge tends to increase in that the covenant of the bond may bring a restriction for the company for offering out any future bonds senior to current bonds. During bankruptcy, In case of a default, the senior bond gets preference over other bonds. Seniority of the bonds benefits the holder's such bonds as it lessens the risk. This makes the coupon rate of the bond to be less. One of the pitfalls of senior bonds is that it is a low-risk sort of bond hence the company requires collateral to back these bonds.

Presence of Sinking fund

A sinking fund will work on reducing the coupon rate since it offers a partial guarantee to bondholders. The challenge with the sinking fund is that the organization must make the interim payments into a sinking challenge with sinking fund in the company. The Sinking fund account helps the bond issuer to repay the principal before the maturity date. The trustee of the bond manages the account. The company makes regular payments on an annual basis to the trustee of bonds with respect to the sinking fund and the trustee withdraws part of the outstanding debt. Since the sinking fund retires the debt before date, it is an advantage to the issuer making the coupon rate of the bond with a sinking fund to be higher. Though sinking fund helps reduce risk by protecting the bondholder against default risk, the holder still has interest rate risk to deal with. The corporate usually wants the prepayment of the bond done when the market interest rates are lower than that of the bond. When the bondholder gets back his principal earlier than expected, he invests that amount on other bonds with lower rates. It is then evident that the company must be in a position of generating the cash flows.

Call provision with specified call dates and call prices

This enables the company to reacquire the whole or part of its bonds after a specific period of time and at a specific price. Since the call provision enables the company to retire the debt early, it becomes an advantage to the issuer or the corporate hence the coupon rate of the bond with call provision is higher.

A deferred call accompanying the call provision

A deferred call reduces the coupon rate relative to a call provision with a deferred call. The bond will still have a higher rate relative to that of tradable assets. The deferred call means that the company will not be able to call the bond for a specified period. This offers some sort of protection to the bondholder during this period. The disadvantage of a deferred call is that the interest rate may fall to the level where it is beneficial for the company to call the bond, yet the company cannot call until the specified period is over.

A Canada plus call provision

According to (Heinzl, 2017), Canada plus call provision allows companies to redeem bonds when it is advantageous to them. The investor exercises this rate when certain conditions are favorable, and they want to cash in when their return is likely to be relatively high. The advantage with this is that it protects the bondholder as it specifies what the investor will get if the issuer exercises this option. Even if there is a significant reduction in interest rates, it may be to the issuer's benefit to exercise this call.

Any positive bond covenants

Any positive bond covenant is a clause in a loan contract and it requires the firm to meet certain obligations. For example, it can require the issuer to regularly provide audit reports to creditors or to ensure its assets adequately. The positive or affirmative covenants do not limit the operations of a business. It does not limit the number of dividends a firm can pay its shareholders. This can reduce funds for interest and principal payment to lenders hence positive covenants makes the bonds unsafe to the investors.

Any negative bond covenants

Negative covenant materially limits a corporation from engaging in certain actions. Some of the restrictions imposed on borrowers through this covenant include restricting an issuer from issuing more debt until maturity of one or more bond series. The company borrowing may be restricted from paying dividends over a certain amount to shareholders to ensure no increase in the default risk to holders since increasing money paid to shareholders reduces the funds available to make interest and principal payment obligations to the lending firms. The general observation is that the more negative covenants in a bond issue, the lower the interest rate on the debt because restrictive covenants make the bonds safer in the eyes of investors.

A conversion feature

They include

Call and put features

It is for the issuer, and it will decrease the value of the convertible bond. To make things more complicated, there are "protected" calls or "soft" calls where the bond is only called if the share price is above a certain set level. Some convertible bonds may also have put features that allow the buyer to put back the bonds to the issuer. This is buyer's option and it would increase the value of the convertible bond. If the call and put features occur simultaneously, then priority is given according to the prospectus (Da, 2004).

Refix Clauses

It changes conversion ratio relative to the share price level on certain days from the time of issuance the time of expiry and this makes it attractive to investor and will increase the value of the convertible bond (Da, 2004).

Conversion proceeds

It is like a bond because it makes regular interest and principal payments, but these bonds also give the holder the freedom to convert the bond into shares. (Spiegeleer & Hulle, 2014) In most cases, the conversion number, as well as the cash amount, differs as a function of time. Secondly, when a buyer converts and receives shares, these shares may be distributed from existing stock or new shares just issued (WALTHER, 2014). In the latter case, there is a dilution effect of the same company issues more shares. Thirdly, shares receive upon conversion may be denominated into a different currency. The disadvantage of this type of convertible bonds is that it exposes the buyer to currency risk. Finally, the downside of a floating rate coupon is clear that if the interest rate is on the rise, then the company has to offer out a greater interest. However, the secret is that if the interest rate is falling, then the company will be paying an interest rate that is lower.

A floating rate coupon

A floating rate coupon's interest rate changes as often as the issuer chooses. The frequency of the changes in the interest rates varies from once in a day to once in a year. The reset period forms the basis upon which the investor predicts how often the rate adjusts. The issuer normally pays the interest either on a monthly, quarterly, semiannually or sometimes on annual basis. It can issue with or without a call option. The advantage of a floating rate coupon is that it has a lower degree of sensitivity to changes in interest rates making it appeal to investors when interest rates are rising to lead to higher level of coupon payments.


WALTHER, B. (2014). THE PERIL AND PROMISE OF PREFERRED STOCK. Delaware Journal of Corporate Law, 39(1). BIBLIOGRAPHY Da, Z. (2004). Teaching Note on Convertible Bonds. 1 &2.

Heinzl, J. (2017, October 20). What is a 'Canada call' and why was my bond redeemed early? Retrieved from The globe and mail: https://www.theglobeandmail.com/globe-investor/investor-education/what-is-a-canada-call-and-why-was-my-bond-redeemed-early/article36677754

Nikolaev, V. V. (2010). Debt covenants and accounting conservatism. Journal of Accounting Research, 48(1), 51-89.

Spiegeleer, J. D., & Hulle, W. S. (2014). The Handbook of Hybrid Securities: Convertible Bonds, CoCo Bonds, and Bail-In. Retrieved from Business Management Ideas.

Walther, B. (2014). The peril and promise of preferred stock. Del. J. Corp. L., 39, 161.

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Tuxedo Air Company Analysis Paper Example. (2022, Sep 22). Retrieved from https://proessays.net/essays/tuxedo-air-company-analysis-paper-example

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