Strategic Corporate Finance: Applications in Valuation and Capital Structure

CAPITAL MARKETS SOLUTIONS

The evidence suggests a greater percentage of assets be invested in fixed-income securities. However, for non-taxpaying cases, as well as until the rating agencies get up to speed, efficient frontier analysis suggests maintaining some equities to avoid adding cost and risk.

Yet for some corporate plans, de-risking at current market levels may still be unattractive as this would crystallize any remaining deficit. So, these funds have established a roadmap, where equity weightings will be reduced over time as funding levels are restored. We propose numerous capital market solutions to increase fixed-income exposure, optimize the risk-return trade-offs, and create shareholder value, including the following: sell equity/buy fixed income, buy-write options programs, collar strategies, relative performance options, and swap overlays.

Sell Equity, Buy Fixed Income

The simplest strategy is to sell equities and buy fixed-income securities, or possibly entering into an equity swap, to lock in equity values and receive fixed-income returns. A swap strategy may be less attractive because transaction costs of the swap will likely exceed those of buying and selling stocks and bonds.

Leveraged Fixed Income

A more muted approach is to borrow at the parent company level to invest in fixed-income securities. This assumes that there is debt capacity within the rating for increased borrowings, and capacity within the pension for increased funding without risking an overfunded ...