THE AUTHORITY ON BOND AND LOAN COVENANTS

Research Date: November 22, 2016

Century Bonds: Preliminary Thoughts on Building American Infrastructure with

Long-Dated Treasury and Corporate Bonds

The Bottom Line:™

 We consider Trump’s plans for substantial infrastructure spending, and the

possibility of how this might evolve into including very long-dated bond issuance as
a significant component of those plans.
 If such financing were to be implemented, and if U.S. corporate bond issuers follow
suit as a longer U.S. government yield curve is established, we briefly consider what
the bond terms for those corporate issuers might look like.

President-elect Donald Trump and various of his advisors Could Century Bonds finance America’s infrastructure
such as Wilbur Ross have championed the idea of massive for the next 100 years?
infrastructure investment – perhaps $1 trillion worth.1
There has been speculation that the program would
involve mechanisms of tax credits for private projects that
generate their own revenue streams, such as toll roads.
However, an alternate plan may emerge that addresses
new project construction alongside less exciting projects
like refurbishment of aging sewer systems and bridge
repair. If a balanced plan is executed, one component of
the financing could include U.S. government debt – and an
obvious choice may be Century Bonds – debt that doesn’t
have to be repaid for 100 years. These kinds of Century
Bonds have been issued in many other countries and even
occasionally in the U.S. A renewed market for long-dated
government debt would likely establish a yield curve that
could promote more long-dated corporate debt as well. In
this report, we briefly review this Century Bonds concept
and how the contract terms might work for very long-
dated corporate bonds. Covenant Review does not take
any political position nor attempt to handicap how any
political debate might evolve – we are seeking to be early
in outlining some contract-related possibilities in our role
of predicting and advising on indenture terms for our
subscribers.

1
See the October 27, 2016 Ross position paper Trump Versus Clinton On Infrastructure. And see criticism by Bernie Sanders of the
concept as a “scam” and “corporate welfare”: Bernie Sanders Rails Against Donald Trump’s Infrastructure ‘Scam’.

ANALYST CONTACT Covenant Review, LLC

Adam B. Cohen 19 West 44th Street, Suite 1401
1-212-716-5780 New York, New York 10036
acohen@covenantreview.com www.covenantreview.com
 Century Bonds: Preliminary Thoughts on Building American Infrastructure
With Long-Dated Treasury and Corporate Bonds

Century Bonds are an old idea – just not often talked about in the U.S.

Century Bonds are exactly what they sound like – debt that doesn’t have to be repaid until 100 years from when the bonds
are issued. Century Bonds have been used by governments, universities, and even corporations to finance investments
and put in place very long-term, stable funding for maintenance and expansion of institutions.

Some government issuers of very long-dated Some corporate issuers of long-dated bonds
bonds: maturing 40 to 100 years from issuance:

 Ireland:100-year bonds – sold in May 2016 at  Amgen

just 2.35%
 Apache Corporation
 Belgium:100-year bonds – sold in April 2016 at
2.5%  Archer Daniels Midland
 Spain:50-year bonds – sold in May 2016 at just  Caterpillar
 Électricitéde France
2
3.45%
 FedEx
Some non-profit issuers of very long-dated bonds:
 Ford Motor Company
 Boston University
 Bowdoin College  Home Depot
 Caltech  IBM
 Hamilton College  JC Penney
 MIT  Noble Energy
 New York Presbyterian Hospital  Norfolk Southern
 Ohio State University
 Petrobras
 Tufts University
 Rockwell Automation
 University of California
 University of Pennsylvania  Sherwin Williams
 University of Southern California  Union Carbide Corporation
 Wesleyan  Valero Energy
 Yale University  Wisconsin Electric Power

Long-dated bonds are being issued at extremely low rates.

Government and corporate bonds are being issued at historically low interest rates. The chart below shows how yields on
US. government 10-year and 30-year debt have fallen from around 8% in 1977 to under 2% for 10-year bonds today and
just 2.76% for 30-year notes:

2
See the May 11, 2016 Wall Street Journal story, The Very Long Bet: 100-Year Bonds That Pay Peanuts. We are not citing the
source for each point in this report due to space considerations and relative ease of checking the mentioned bond maturities and
interest rates.

2
 Century Bonds: Preliminary Thoughts on Building American Infrastructure
With Long-Dated Treasury and Corporate Bonds

In the past two years, high quality investment grade corporate issuers have obtained extremely low interest rates for
their longer-dated financings. In 2015, Bristol-Myers Squibb sold 20-year bonds at a mere 1.75% interest rate while
Coca-Cola sold 20-year bonds with a 1.625% coupon. In 2016, Disney sold 30 year bonds with an interest rate of
just 3%, while Home Depot sold 40-year bonds that pay just 3.5%. These low rates have excited many government
and corporate issuers – and may be a key financing component if there is a significant bipartisan infrastructure plan.
A long-dated U.S. Treasury bond would be structured like the many routinely traded Treasury bonds of today,
backed by the full faith and credit of the United States government, simply with a longer maturity. And if U.S.
Century Bonds are issued, then more corporate issuers are likely to follow suit as their Century Bonds could be
priced off of a U.S. government yield curve. Those bonds could create a near “permanent” funding for corporates.

What would be the covenant terms for Century Bonds issued by corporate issuers?
Our working assumption is that only corporate issuers with an investment grade credit rating will find a market for
Century Bonds. Generally, most high grade bond issuers have been selling bonds with the same restrictive covenants that
they were selling their bonds ten and fifteen years ago, with the addition of a Change of Control covenant. We expect that
Century Bonds should invite some higher covenant scrutiny because of the much longer period of potential corporate
activity. Thus, we think Century Bonds for corporates should have these key provisions:

 Liens covenant: This covenant appears almost universally in investment grade bonds, and should be applicable to
Century Bonds issued by corporate issuers. For Century Bonds, the covenant should apply to the corporate issuer and
its subsidiaries, and generally limit these entities from pledging their properties and assets to secure other debt, unless
the Century Bonds are equally and ratably secured. Carveouts to the general rule would provide some capacity for
senior secured debt, as well as allowing secured debt to finance capital expenditures or acquisitions (and secured only
by the assets acquired).
 Mergers covenant: This is a bedrock covenant for investment grade that determines what happens when there is a

3
 Century Bonds: Preliminary Thoughts on Building American Infrastructure
With Long-Dated Treasury and Corporate Bonds

corporate merger or “substantially all” assets of the issuer and its subsidiaries are transferred. This standard provision
should be maintained for Century Bonds.
 Guarantees / restrictions on structural subordination: Subsidiaries should guarantee the Century Bonds, or there
should be a limit on incremental debt of non-guarantor subsidiaries, or both. This concept already exists in some
investment grade bond issues. The inclusion of covenants addressing this concept would be especially helpful for
Century Bonds, to mitigate risks of structural subordination over the longer-than-usual lifetime of the Century Bonds.
 Change of Control: This covenant began appearing in earnest for investment grade issuers in the wake of the 2006-
2007 LBO boom. Investors can put their bonds back to the Company at a designated price upon a transformative
change of control of the Company – this is an idea that should be retained for Century Bonds.
 Ratings-based coupon step-up: This covenant has been included in a number of investment grade issues where the
market perceives some risk of future credit deterioration, and compensates investors by increasing the coupon on
bonds when credit ratings decline to certain levels. Typically, the interest rate increase by one-quarter of one percent
for each downgrade by each of two rating agencies, and the maximum rate increase is capped at 2%. This type of
price protection would be especially valuable for Century Bonds, where the credit profile of the corporate issuer may
be completely transformed during the life of the Century Bond.

Conclusion
We of course recognize that there are endless political and practical
issues that are raised by the concept of Century Bonds and the raising of
significant new government debt generally: the concern that new
government debt issuance may crowd out the demand for new corporate
investment, the question of how much appetite Congress (and the
electorate as a whole) would have for additional government borrowing,
etcetera. These issues are beyond the scope of this report. We are
merely seeking to present a possible way for financing infrastructure
that seems plausible using America’s robust capital markets resources
and a concept that has previously been employed for government, non-
profit, and corporate issuances. This possibility has not yet been raised
in the mainstream media, yet might emerge as part of a potential
compromise approach in the infrastructure discussion, and with
important knock-on effects for the corporate bond market. And if it
happens, you heard it here first!
Questions about this topic?

Email the author, Adam Cohen, at acohen@covenantreview.com.

Adam B. Cohen is the Founder of Covenant Review and its parent company, Fulcrum Financial Data. He
graduated in 1997 from Georgetown University Law Center, where he was on the Georgetown Law Journal. He
has been a corporate finance attorney with Latham & Watkins and an investment banker with Lehman Brothers,
working in New York and Hong Kong, where he represented banks and sponsor-backed issuers in debt, equity,
and M&A engagements. Adam has reviewed and discussed with investors thousands of credit documents. He
has served as the Vice President of the Fixed Income Analyst Society, co-authored two chapters in Frank
Fabozzi’s Handbook of Fixed Income Securities, regularly lectures on covenant issues, and has been cited by the
Delaware Chancery Court on indenture matters.

4
 Century Bonds: Preliminary Thoughts on Building American Infrastructure
With Long-Dated Treasury and Corporate Bonds

Disclosures

All content is copyright 2016 by Covenant Review, LLC. The recipient of this report may not redistribute or
republish any of the information contained herein, in part or whole, without the express written permission of
Covenant Review, LLC and we will criminally and civilly prosecute copyright violations against firms and
individuals who unlawfully distribute our work. The use of this report is further limited as described in the
subscription agreement between Covenant Review, LLC and the subscriber. The information contained in this
report is intended to generally describe certain covenant features. This report is not comprehensive, is not
confidential to any person or entity, and should not be treated as a substitute for professional advice in any
specific situation. Covenant Review, LLC makes no warranty, express or implied, as to the fitness of the
information in this report for any particular purpose. If you require legal or other expert advice, you should
seek the services of a qualified attorney or investment professional. Covenant Review, LLC does not render,
and nothing in this report constitutes, legal or investment advice, and recipients of this report will not be
treated or considered by Covenant Review, LLC as clients or customers except as described in the
subscription agreement between Covenant Review, LLC and the subscriber. The covenants discussed herein
may be based on those published in the preliminary offering memorandum distributed by the issuer in
connection with the issuance of the notes, and the covenants published in the final offering memorandum or
contained in the final indenture may differ from those presented herein. The reader should be aware that the
final interpretation of any bond indenture will generally be determined by the issuer or its counsel, or in
certain circumstances, by a court or administrative body.