New Look, a fashion retailer in the UK, is to launch a £800m bond issue as it attempts to refinance towering debts accumulated under private-equity ownership. The company has borrowings of £1.1bn, equivalent to more than five times its current operating profits. The five-year bond issue, if successful, will give the new chief executive, Anders Kristiansen, more financial freedom to pursue a turnaround of the business, which has lost out in recent years to rivals such as Primark, George at Asda and H&M.
The bonds issued by New Look offer an annual income of almost 9 per cent. They come with some asset security but there may not be anything left in a bankruptcy when the lessors of New Look stores will be paid first and the £800m of bonds are considered subinvestment grade.
Explain the relevance of default risk in the corporate bond market and discuss the ways in which investors may identify default risk of corporate bonds.
Here are the comments on above from the prof:
Here are some additional guidelines for the Finance & Investment coursework:
1. It’s an essay question. You are supposed to write a brief introduction to provide background and motivation as well as a brief conclusion to summarize your answers. Notice that both the introduction and conclusion are helpful but need to be brief because there is a maximum word limit of 1500 words.
2. Tables and charts will not be counted in the word limit, use them wisely.
3. The questions can be answered generally, meaning you don’t have to focus your answers specifically to the New Look case I provided.
4. The allocation of marks across different elements of the answers are as follows
Part 1: Importance of default risk 25%
Part 2: Ways in which investors may identify default risk of corporate bonds
(1) Credit ratings 40%
(2) Univariate analysis i.e. analysis based on a single financial ratio 15%
(3) Multivariate analysis i.e. default prediction models that incorporate more than one variable 20% (focus primarily on the Altman Z-score and Ohlson O-score models).
You should adjust your focus based on the mark allocation. Moreover, when answering part 2, in addition to explaining and describing various methods, you could also compare their relative advantages and disadvantages to enrich the answer.