Introduction
Firms decide which type of private debt to use based on their financial needs, creditworthiness, and the availability of various financing options. Private debt includes any debt that is not issued or guaranteed by a government agency, such as corporate bonds or bank loans (Berk et al., 2021).
Main Body
Firms have a choice in selecting the type of private debt that best fits their needs and financial situation. For example, a company with a strong credit rating may be able to obtain lower interest rates and better terms than a company with a weaker credit rating (Li et al., 2020). In considering their financing options, managers of firms may consider what is being offered by financial institutions (FIs). FIs, such as banks and asset managers, offer a variety of private debt options with different interest rates, maturities, and collateral requirements (Berk et al., 2021). Firms may negotiate with FIs to obtain the best possible financing terms, such as lower interest rates or more flexible repayment schedules.
Conversely, FIs look for firms with strong financial profiles and a low risk of default. FIs may evaluate a firm’s financial statements, credit ratings, and overall financial health when considering whether to extend private debt financing. FIs may consider the industry or sector in which the firm operates and any macroeconomic factors that may affect its ability to repay the debt. Considerations taken into account by both firms and FIs include the cost of financing, the maturity of the debt, the collateral requirements, and the level of risk associated with the debt (Li et al., 2020).
Conclusion
Negotiations between the two parties may involve discussions of interest rates, repayment schedules, and collateral requirements. In some cases, FIs may require a firm to provide additional financial disclosures or restrictions on its operations as part of the loan agreement.
References
Berk, J. B., De Marzo, P. M., & Hartford, J. (2021). Fundamentals of corporate finance (5th ed.). Pearson Education.
Li, Z., Tang, Y., Wu, J., Zhang, J., & Lv, Q. (2020). The interest costs of green bonds: Credit ratings, corporate social responsibility, and certification. Emerging Markets Finance and Trade, 56(12), 2679-2692. Web.