S&P has previously given a BBB rating on On-The-Bubble Corporation. Today, On-The-Bubble Corporation’s investment banker gives the company’s CFO a frightening call. After talking over the prospective deal with S&P, this banker thinks that there’s a risk that S&P will rate On-The-Bubble’s next issue at BB.
If the downgrade does occur, do you think On-The-Bubble Corporation could still fund this same project by issuing $100,000,000 in par value of new 10-year maturity, 0% coupon rate senior unsecured bonds? (A, B, C, or D?)
A. Yes. Downgrades are common and investors would forgive the company.
B. No. The market would be closed to On-The-Bubble.
C. Yes. A new class of high-yield bond investors would be happy to buy On-The-Bubble’s debt.
D. No. On-The-Bubble would have to issue more than $100,000,000 in par value.