You are a capital markets product specialist at an Investment Bank. You have been approached by Severn Trent PLC, a UK based Water and Waste Utilities Corporation who are seeking to raise finance by issuing debt securities.

They have asked you to provide a clear and detailed report profiling their various options.

Part 1

Using copies of the Annual Financial Reports & Accounts for Severn Trent (they are available online at Yahoo finance, MSN finance or the company's website), evaluate:

a. Whether the company in a position to issue debt securities or should it consider issuing equity instead?

You will need to review the company's financials, quantify the existing gearing level and evaluate the company's ability to service debt payments via its free cash flow using FCFF, FCFE and EBITDA

b. The advantages and disadvantages of issuing a bullet bond. How a bullet bond is priced, how a credit spread involved is. What are the risks and costs to the company of issuing such debt?

c. Should the bond be callable or puttable? Explain what is meant by these terms and how does it affect the pricing of the issue.

d. Should Severn Trent PLC consider a convertible bond issue? What are the mechanics of convertible bonds and what are the cost and payoff implications to both Seven Trent PLC and the Investors?

e. Should Severn Trent PLC consider an inflation linked bond? What are the mechanics of inflation linked bonds and why might this be very suitable for Severn Trent PLC. What would be the cost and payoff implications to both Severn Trent PLC and the Investors?