Accounting Best Practices, Fifth Edition

11–3. Issue Direct Access Notes

An interesting financing option is to issue bonds to retail investors through brokers, rather than issuing to institutional investors. These bonds are called direct access notes (DANs). This is an alternative source of funding that can be useful in tight credit markets. It is also a good long-term funding source, since bond durations can extend to 30 years. Further, because offerings are usually relatively small and on a frequent basis, they are useful for companies wanting to fine-tune their cash and debt balances. Finally, holders do not usually flip their DAN holdings, preferring instead to hold them for the long term.

A number of well-known organizations now issue DANs, including United Parcel Service, John Hancock Life Insurance, the Tennessee Valley Authority, Caterpillar Financial Services, and the City of Chicago.

A DAN is usually sold in $1,000 increments, at par. They are attractive to investors, because they feature a survivor’s option under which the notes can be put back to the issuer at par in the event of the holder’s death; this eliminates any market risk caused by changes in interest rates.

The primary broker of DANs is LaSalle ABN AMRO, which runs an informative Web site on the topic at www.directnotes.com.

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Installation time: