5 - Long Term Financing - Debt and Equity

LONG TERM
FINANCING DEBT
AND
ChaptersEQUITY
15, 20
Long Term
Financing An
Introduct
ion
Long Term Financing - Debt and

Equity
Chapters 15, 20 and 21
An Introduction - Outline
3
Internal and external financing in

Canada
Common stock.
Features, shareholder rights, share
classes.
Long term debt.

Preferred shares.

Equity
Financing New
Projects - Pecking
Order
Theory
Firms prefer
to fnance with internally
generated cash fow rather than outside

sources of funds.
Canadian firms have historically financed

about 2/3rds of their investment needs from
internally generated cash flow.
Firms adapt dividend policies to reflect their
long term financing needs but because of
fluctuations in a firms cash flow, retained
earnings might not be enough.
If a frm has excess cash, it will tend to

pay of debt
repurchasing
shares.
Longbefore
Term Financing
- Debt and
Chapters
15, 20 and 21
Equity
Internal and External

Financing for Canadian Firms,
250,00
1991-2009
0
interna
l
fnanci
Trust
ng
units
200,00
0
150,00
0
100,00
0
50,00
0
50,00
0
199
1
199
4
199
7
200
0
200
3

Equity
200
6
200
9
Comm
on
stocks
Preferre
d
stocks
Corpora
te bonds
Stock Performance Following

Debt Issues
Impact of Securities Offerings and Bank Borrowing on
the Value of the Firms Common
Stock
2-Day Abnormal Stock
Return
Smith
James
L&M
Convertible preferred stock
-1.44%
Preferred stock
-0.19%
Convertible bonds
-2.07%
Public straight bonds
-0.26%
Private placement of debt

Bank loan agreement
New bank credit agreement
Revised bank agreement
0.11%
0.91%
1.93%
0.61%
0.01%
3.98%
Common Shareholders
7
Common shareholders are frm owners and residual

claimants.
Common shareholders face limited liability.
Shareholder rights:
Right to share proportionally in dividends paid or in

assets after all liabilities are paid.
In theory, have control over operations of company (e.g.
the right to vote at annual meetings).
Right to share proportionally in any new stock sold when
approved by a board of directors.
Right of transfer.
Straight voting is one vote per share

Cumulative voting is # votes = # shares held x #
directors to be voted.
Term Financing
- Debt and
Provides for Long
minority
participation.
Equity
Features of Common Stock

8
Authorized versus outstanding shares.

Contributed surplus versus retained
earnings.
Shares may have diferent classes of
common stock:
Diferent voting rights for insiders and

outsiders.
Diferent voting rights for foreigners.
Dividends
Corporations cannot default on undeclared

dividends.
Dividends are not seen as a business
Term Financing - Debt and
expense Long
not
tax
deductible
to
firm.
Equity
Ethical Issues with Dual Class

Voting Rights
Dual class voting rights separate cash

fow rights from voting rights among
diferent groups of shareholders:
Allow tightly held firm to raise financing

without diluting control.
Deter corporate raiders from gaining
control of a firm.
Dividends on nonvoting stock must be at

least as high as dividends on voting stock.
BUT
If insiders hold shares with better voting
rights, theyLong
have
the
incentive
to
Equity
All Sorts of Values

10
Book Value
Market Value
Sum of retained earnings, contributed surplus, and

share capital (initial proceeds from issue of equity).
Measure of what has happened in the past.
Current market price of the equity.
A measure of future prospects of the frm.
Market-to-Book ratio
The ratio of market-to-book is a measure of fnancial

success of the frm.
If this is greater than 1 frm is growing, has good
prospects for the future.
If ratio <1, either frm is undervalued, or there is
something fundamentally wrong with company.
Equity
Straight Debt Distinctions

11
Debt is not ownership in the frm:
No voting power.
Interest payments on debt are fully tax
deductible by corporation.
Unpaid debt is liability of a frm.

Equity
Preferred Shares
12
Senior to common stock, junior to debt.

Shares have a stated liquidating value
on the and typically have a stated
divided per share amount.
Most have cumulative dividends if the
frm misses paying a preferred share
dividend.
If dividends have been deferred:
Common shareholders must also forego

dividends.
Preferred Equity
shareholders may be granted
Preferred Shares
13
Convertible preferred shares.
Can be exchanged for common shares in

the future.
Adjustable rate dividends - usually

tied to prime rate.
Preferred shares often have ratings
just like bonds.
Some issues have associated sinking
funds:
This implies that issue will be ultimately

retired. Long
Equity
More on Preferred Shares

14
From investors point of view From firms point of view
Preferred shares
Canadian
increase leverage
corporations do
marginally.
not pay tax on
They do not dilute
preferred share
control of company.
dividends received
Non payment of
from other
dividends does not push
Canadian
the company into
corporations.
bankruptcy.
Individuals do pay
Expensive, unless they
tax.
are lightly taxed or dont
pay tax at all.
Most preferred
shares are Long

Yield rates are
Equity
A Summary of Financing
Instruments
Common Stock
Preferred Stock
Bonds
Ownership
Voting rights.
Generally no
Obligation to
provide return
None
Bankruptcy
Claims
Distn Cost
Risk return
trade off
Lowest
Before
common
dividends
Second
Limited rights
under default
Contractual
Obligation
Tax status of
payment by firm
Tax status of
payment to
holder
Tax status
Chapters
15, 20 of
and 21
payment to
Highest
Highest risk;
highest return
Moderate
Moderate
risk;
moderate
return
None dividends
None dividends
pd from after tax
pd from after tax
income.
income.
Grossed up
Grossed up
dividend tax
dividend tax
credit
credit
Tax exempt
Tax exempt
Long Term Financing
- Debt and
Equity
Highest
Lowest
Lowest risk; lowest
return
Interest payment
is tax deductible
Fully taxable
Fully taxable
15
16
Issuing Equity
Securities

Equity
Issuing Equity - Outline

17
The basic procedure:
Public and private oferings.
New equity sales and the value of

the frm.
IPOs.
Features of common stock.

Equity
How Firms Raise Equity

18
Publicly via a general cash ofering

made to all investors
Public pays cash for shares.

Cash sales facilitated by an underwriter.
Privately via private placement, or

with venture capital.

Equity
Procedure for a New Issue

19
Management obtains approval from board of

directors to issue securities.
Prepare prospectus for securities commission and

potential investors.
Once registration is fled, there is a 20 waiting period for

approval.
After approval, issue is priced seasoned oferings

are priced close to current market value.
They obtain an underwriter, decide how much money is

to be raised and what sort of securities should be issued.
This could take several months.
A full prospectus is developed. Because the price is set

as close to the current market price, frms want a very
short window between when the security is priced and
when it is ofered for sale.
Securities

areEquity
ofered for sale
the underwriter
20
Regulation of Public Sources of

Capital
Public securities governed by SEC in the

States and in Canada, each province has
regulatory body.
Firms that list on the TSX come under the
jurisdiction of the Ontario Securities
Commission.
There is a move towards more uniform
regulation across Canada as proposed by
the Canadian Securities Administrators.
Regulators are responsible not only the
listing of securities,
but also the
gathering
Equity
and publishing
insider reports, overseeing
21
Decreasing Regulatory
Drag
Prompt Ofering Prospectus System
Large, existing firms that make regular

disclosures to OSC (and other provincial
regulators) are waived from prospectus
requirement.
Use short-form prospectus.
Takes 5 days to be reviewed instead of 20
days.
Popular with bought deals.
In early 1990s US and Canada

introduced Multi- Jurisdictional
Disclosure Long
System
Equity
Way for firms
that trade in Canada and US
22
Role of Underwriters in
General Cash Ofering
Underwriters have four main functions:
Origination - the mechanics of producing the

issue, including pricing advice.
Distribution - selling the issue.
Risk bearing - issuing new shares is risky! The
amount of risk borne depends on the
underwriting agreement.
Certification - quality control.
Compensation received is called the

spread or the diference between the
underwriter's buying price and the selling
price.
Amount of compensation is a function of the

amount ofLong
risk
borne
by
underwriters.
Equity
23
Types of Underwriting
Agreements
Firm Commitment
Best Efforts
Underwriter buys entire issue at a fixed

price and then resells it. Underwriter bears
risk of under-subscription.
No commitment to sell all securities.
Securities sold on a fixed commission basis.
Firm bears undersubscription risk.
Bought deal
Canadian invention. Underwriter buys entire

issue before initial prospectus is produced
Long investors.
and lines up
Equity
24
The Cost of Issuing

Securities
Spread:
Abnormal returns:
Other direct
expenses:
The diference
between the price
the issuer receives
and the ofer price.
These are costs

incurred by the
issuer, that are not
part of the
compensation to
underwriters.
Indirect expenses:
Underpricing:
Price drop in trading

stock upon
announcement of
seasoned issue.
Arises in IPOs.
Loss that arises from
selling shares for less
than they are worth.
Overallotment
(Green Shoe)
option:
These costs are not

reported onLong
the
prospectus.Equity
Covers excess
demand for issue.
The Cost of Going Public in

Canada, 1984-1997 (table
20.6)
Fees
6.00%
Underpricing (first day trading 7.88%
return)
Total
13.88%
The above fgures understate the total

cost because they ignore indirect
expenses or the overallotment option.
In the U.S.: IPOs have an average cost
of 10.14%. (1990 to 2008)

Equity
26
Why Do Stock Prices Drop

When Firm Issues New Equity?
When firms raise funds through a seasoned

ofering, current stock price falls 2% - 3%.
Information Asymmetry:
Revised Beliefs about Financial Distress
Firm is issuing stock now because common stock is

over valued.
Firms have the incentive to issue equity if they
are facing future fnancial distress.
Thus the market interprets an issue of equity as
a sign that the frm must be facing higher
fnancial distress costs.
Signal of Bad News:
Term Financing
- Debt
Chaptersissued
15, 20 and 21
If frm had Long
good
news,
it and
would have
Equity
The Initial Public Ofering

27
First ofering of stock to general

public.
Similar to ofering a seasoned equity
ofering, except for the price setting.
Steps involve:
Firm contracts underwriter to bring IPO

to market.
Prospectus is produced.
Stock price is set (typically way before
expected market price).
Issue is listed.
Equity
Performance of IPOs
28
Look at the diference between the

ofering price and the price shortly
after ofering 10 20% underpricing.
(see table 20.3 in text).
Why under-price?
Underwriter incentives.
Leave investors with a good taste in
their mouths.
Signalling (Grinblatt and Hwang (1989)).
Asymmetrically informed investors (Rock
(1986)). Long Term Financing - Debt and
Equity
29
When Some Investors Have

Better Information: the
Firms A and B are
going public and each have 50
Winners
Curse
shares for sale.

Over subscribed issues will be allocated on a
proportional
basis.
Firm
Low
Probability
High
Probability
The following frm value expectations are common
Firm
of Low
Firm
of High
knowledge.
Value
Value
Value
Value
A
5
0.5
15
0.5
B
5
0.5
15
0.5
You have $100 to spend on shares.
Suppose the underwriter prices both A and B at
$10 per share. What would you do?
Some of you will have private information...
Equity
The Winners Curse Finale

Group #
Shares
A
Request
ed
1
2
3
4
5
6
7
8
9
Chapters
10 15, 20 and 21
#
Shares
A
Receive
d
#
Shares
B
Reques
ted

Equity
#
Shares
B
Receive
d
31
Three Empirical Conclusions

on Underwriting Costs
There are substantial economies of

scale in issuing securities.
For smaller issues, the cost of
underpricing may exceed direct
issue costs.
It costs more to foat an IPO than a
seasoned ofering.

Equity
32
Pricing a New Issue

(Simplifed)
First step is to calculate value of frm for

IPO:
Use dividend growth model, estimating

rs the total dividends to be paid and
the expected dividend growth rate.
Value of all equity firm
payable next year

S
Total cash dividends
rs
net
P
E
income
estimated
dividend
growth
Then priceLong
per
share
is S/rate
# shares
issued.
Equity
Example
33
Thomas Enterprises is planning its frst

public ofering of common stock. The CFO
estimates that the equity investors
required rate of interest is between 13%
and 15%. Earnings and cash dividends are
expected to grow by 7% - 8% a year for the
foreseeable future, while cash dividends to
be paid out next year total
$500,000.
What is the range of possible total current

market values for the stock of this firm?
There are Long
million
shares of stock
Equitybut 100,000 will be held by
outstanding,
34
Long Term
Debt

Equity
35
Liability Management Outline
Corporate bond features, covenants

and options
Callable bonds.
Diferent types of bonds.
Zero coupon and floating rate bonds.
Bond refunding.
Bond ratings.

Equity
Corporate Bond Features

36
A bond is simply long term debt. The

interest paid on the bond is called the
coupon and the amount that is paid on
maturity is the face value of the bond.
Features of a bond include:
Cash flow pattern (coupon, amortisation &

face value).
Price.
Bond covenants.
Maturity.
Options.
Equity
Bond rating.
Features of a Hypothetical
Bond
Terms
Explanation
Amt of
Issue
Issue Date
$100
million
10/21/10
Maturity
10/21/30
Annu
al
Coup
on
Ofer Price
10.5
100
Yield
10.5
The company will issue $100m in

bonds
The bonds will be sold on Oct. 21st,
2010
These are 20 year bonds: the
principal will be paid back on
October 21st 2030.
The denomination of the bonds is
$1000. Each bondholder will receive
$105 in interest a year.
The ofer price will be 100% of the
face value, so it will be sold at
$1000.
EquityIf the bond is held to maturity,
Features of a Hypothetical
Bond
Terms
Explanation
Coupon
12/31, 6/30
Paymt
Dates
Security
None
Sinking Fund Annual
Coupons are paid out semi

annually. Each coupon is for
$105/2 =$52.50.
The bonds are debentures
The frm will make annual
payments into a sinking fund to
accumulate the principal
Firm can repay bondholders at
any date after Oct 21st, 2020.
Call Provision Not

callable
before
10/21/20
Call Price
$1100
Rating
AAA
If bonds are called early, frm

will pay bondholders $1100
per bond.
Equity DBRS highest rating.
Rating Symbols
39
Dominion bond rating service

Investment Grade - High Creditworthiness
AAA highest investment quality..

AA superior investment quality. Very little diference
between AA and AAA.
A upper medium grade securities.
BBB- medium grade securities. Protection of interest and
principal is considered adequate.
Junk Bonds Lower Grade and Speculative
BB lower medium grade.
B middle speculative. Uncertainty exists as to whether

frm can make future interest and principal payments
CCC in danger of default.
CC are in default of either interest or principal
C lowest rated bonds.

Equity
Indenture Agreement
40
Formal agreement (contract).
It can be several hundreds of pages long!
To protect debtholders, contract details

covenants or restrictions on the issuer
of the debt.
Contract may also list options actions
which may be available to either the
borrower or the debt holder in the
future.
Equity
Bond Covenants
41
Covenants can an be either positive

(what the frm must do) or negative
(what the frm cant do).
Dividend covenants.
Financing covenants (how a firm can
raise debt in the future)
Financial ratio covenants.
Sinking fund covenants.
Bonding covenants.
Equity
Financing Covenants
42
Seniority
Security
Collateral pledged to
protect debtholders in
case of default.
Collateral trust bonds:
The order in
which debt
holders get paid.

Common stock held
by corporation used
Lower seniority
as security.
debt is called
Mortgage bonds.
Secured by mortgage on
subordinated.
real estate or other long
term asset.
Debt can
A blanket mortgage
pledges many assets
never be
owned by corporation.
subordinated
Equity
Bonds that are
The Sinking Fund
Issuer makes annual payments to trustee
Each year, trustee buys back fraction of

bonds either at market value or at face
value, with bonds chosen via a lottery
Sinking funds provide extra protection to
bondholders.
Most start 5 to10 years after initial issuance.
Firm puts aside money for principal repayment.
Sinking funds provide the frm with an

option.
Bonds can be bought back at a price beneficial
Callable Bonds
44
Firm has the right, but not the obligation, to

call back (make debt holders surrender)
issue at a predetermined price at certain
points in time.
The call is often deferred company may
not call bond in frst few years of a bonds
life.
Sometimes there is a fxed call premium,
but most debt issues feature a Canada
plus call.
When bond is called, call premium is set to

compensate
investors
for
the
diference
in
Equity
More on Callable Bonds

45
Callable bonds are more risky to debt

holders, therefore debt holders
demand a higher rate of interest to
ofset this risk.
Thus there should be no monetary advantage

to the firm in issuing callable bonds.
Why do frms then issue callable bonds?
Firms have better knowledge on future

interest rates.
Diferential tax rates between the firm and its
bondholders.
Long Term Financing
-undertake
Debt and
Chapters
15, 20 and 21
Firm opportunities
to
future
Equity
Bond Options
46
Convertible bonds.
Bond can be converted in to common

stock.
Exchangeable bonds.
Similar to convertible bonds but can be

exchanged for shares in another company,
which the issuer may already own.
It may also be exchanged for a bond of
a diferent type (e.g. fxed versus
foating coupon payments).
Equity
Example of a Convertible
Bond
LO21.
5
More Bond Options

48
Put bonds and poison puts.
A bond that allows the bondholder to force

the issuer to repurchase the security at
specifed dates before maturity.
A poison put is triggered by a takeover
attempt.
Extendibility and retractability.
Extendible maturity can be increased

at option of bondholder.
Retractable bond can be redeemed
early at option of bondholder.
49
Covenants and Options and

Coupon Rates
Provisions in bond contract (either

covenant or option) that protect or
give advantage to bond holders will
ceteris paribus result in lower coupon
rates to investors.
Provisions in bond contract (either
covenant or option) that give advantage
to common shareholders (i.e. the frm)
will ceteris paribus result in higher
coupon rates to investors.
Zero Coupon Bonds
Bonds do not issue coupons and

are sold at a discount.
Signifcant call premium issued
at lower YTM.
Benefts to investor
PB Par n
Value
(1
k)
No reinvestment rate risk

when coupons received.
Bond is unlikely to be called.
Firms may purchase these bonds to
match assets with liabilities.
PB =Price of the
bond.
n = number of
periods to
maturity.
k = discount
rate or yield to
maturity.
Disadvantage to investor
Greater volatility when interest rates

fuctuate.
Tax implication: although interest

is not paid until maturity, both
Long Term
Financing - Debt and Equity
Chapters
15, 20 andand
21
investors
frms must
report
Price and Interest Rates

51
Pric
e
Coupon
Bond
ZeroCoupon
Bond

Equity
Because there
are no
intermediate
payments, zero
coupon bonds
are more
sensitive than
coupon bonds
to changes in
interest rates.
Rate of
Interest
52
Floating Rate Bonds and

Interest Rates
Floating rate bonds ofer variable

coupons.
The coupon rate is tied to a
benchmark rate, such as:
Treasury rate.
Fed fund rate.
LIBOR.
Commercial paper rate.
Prime rate.
Upper and/or lower boundaries may be

placed on Long
the
Termcoupon
Financing - Debt and
rate. Chapters 15, 20 and 21
Equity
53
What Happens When Debt

Matures or When Interest
Rates
Change
As interest
rates , frms have the
incentive to call in debt and issue new

debt at lower interest rates.
When will this happen?
This is a NPV calculation:
Consider both the present value of costs

and benefits from refinancing.
Refinance if PV benefits > PV costs.
Instead of using k as the relevant
discount rate, we use ri = rb(1-Tc), the
after tax cost
the- Debt
new
issue.
Long Termof
Financing
and debt
Chapters
15, 20 and 21
Equity
Refunding Time Line

54
New Bond
Old Bond
Retired
Issued Invest
Proceeds
Anniversary of Old
Bond Issue &
Coupon date
Must pay Old

bondholders par
value, call premium
and accrued interest
since anniversary
date.
Tim
e
Bond could be
retired for face
value plus call
Long Term Financing - Calculated
Debt and
at Chapters
simple 15, 20 and 21
premium Equity
interest
Cost Calculation
Tax
Deducti
ble
No
Yes
Call Premium on old bonds

+ Interest that must be
paid on old debt during
overlap period
+ Issuing and Underwriting of
Sort of
The
newflotation
debt (i.e.,
the of
flotation
costs
new debt
costs) a tax shield that is earned
generate
(amortized) over 5 years.
Cost Calculation cont

56
If F is the face amount of the issue, and

p is the call premium, then total call
premium is pF.
Interest paid on the old debt during the
overlap period is
(1- TC )
c old Fisthwehelernegth
of overlap period.
1 1 5
E
i issuing
the
Let ETCbe
and u/w expense. If TC
r
5
r
is the frms
tax rate then the p.v. 1of1
the-5
E
i
TC r
tax
shield is
Total
5
i
pF
(1T
)c
F
cost is
C
old
r 15, 20 and 21
Long
Chapters
ETerm
- Financing - Debt and
Equity
Beneft Calculation
Tax
Deducti
ble
Yes
Interest earned on invested net

proceeds
+ PV interest savings over lifetime of
Yes
new debt issue
+ Unused tax shield from amortization
N/A
of issuing expenses of old bond
This
issue
last is only necessary if the old bond
issue has been called in before it is 5 years
old and typically most bonds cannot be called
within the first 5 years after issue.
Beneft Calculation cont

58
The net invested in the risk free account is FE. If it is invested for the overlap period at a
rate Rf, then the after tax interest earned is
F - E
Rf
1- Tc .
coupon
rate,
the periodic
interest
If F is the
facethen
amount
of the issue,
and cnew is
savings is F(cold- cnew)(1- Tc).
the new
Usually wont have to worry about
unamortized flotation costs from the old
bond, since many bonds have provisions
such
that they cant be called in the first
5
Benefit
-n
1- 1 ri
years.
therefore is
1 C
ne

F - E Rf 1 TC F w T
i
21
Long Term Financing - Debt
and
Chapters 15, 20 and
r
Equity
Example
59
Johnson Management is considering

whether to refund a $50 million, 20 year,
12% coupon rate bond issue that was
sold 5 years ago. The fotation costs on
the 12% bonds were 2 million. The $50
mil in new 15 year bonds would carry an
annual interest rate of 10%. A call
premium of 7% would be required to
retire the old issue and fotation costs of
$1.75 million would apply to the new
issue. TheLong
marginal
tax
is 30%,
Term Financing - Debt
and rateChapters
15, 20 andand
21
Equity
A Second Example
60
Clifton Inc. currently has $250 million of bonds

outstanding, with an annual coupon rate of 14% and a
remaining life of 25 years.
They were issued fve years ago with a foatation cost of

$1.5 million and the interest is paid annually.
From
5 to
9
15%
From
10 to
10%
than
The
indenture
allows
redemption
at
theGreater
following
call 5%
years after
15 years
15 years
premiums:
issue
after issue
after issue
Right now the frm could issue $250 million of 25 year

bonds at par with annual coupons of 11.5%. Interest rates
are not expected to decline further.
Floatation costs on the new bonds are $2.75 million.
There is one month overlap, and Cliftons tax rate is 36%
and the treasury bill rate is 9%.
Should the frm refund the existing bonds?
Equity

5 - Long Term Financing - Debt and Equity

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LONG TERM

Long Term Financing - Debt and

Chapters 15, 20 and 21

Internal and external financing in

Long term debt.

Long Term Financing - Debt and

Chapters 15, 20 and 21

generated cash fow rather than outside

Canadian firms have historically financed

If a frm has excess cash, it will tend to

Internal and External

Long Term Financing - Debt and

Chapters 15, 20 and 21

Stock Performance Following

Public straight bonds

Private placement of debt

Common shareholders are frm owners and residual

Right to share proportionally in dividends paid or in

Straight voting is one vote per share

Chapters 15, 20 and 21

Features of Common Stock

Authorized versus outstanding shares.

Diferent voting rights for insiders and

Corporations cannot default on undeclared

Ethical Issues with Dual Class

Dual class voting rights separate cash

Allow tightly held firm to raise financing

Dividends on nonvoting stock must be at

All Sorts of Values

Sum of retained earnings, contributed surplus, and

The ratio of market-to-book is a measure of fnancial

Chapters 15, 20 and 21

Straight Debt Distinctions

Debt is not ownership in the frm:

Long Term Financing - Debt and

Chapters 15, 20 and 21

Senior to common stock, junior to debt.

Common shareholders must also forego

Convertible preferred shares.

Can be exchanged for common shares in

Adjustable rate dividends - usually

This implies that issue will be ultimately

More on Preferred Shares

From investors point of view From firms point of view

shares are Long

Long Term Financing - Debt and

Chapters 15, 20 and 21

Issuing Equity - Outline

The basic procedure:

Public and private oferings.

New equity sales and the value of

Long Term Financing - Debt and

Chapters 15, 20 and 21

How Firms Raise Equity

Publicly via a general cash ofering

Public pays cash for shares.

Privately via private placement, or

Long Term Financing - Debt and

Chapters 15, 20 and 21

Procedure for a New Issue

Management obtains approval from board of

Prepare prospectus for securities commission and

Once registration is fled, there is a 20 waiting period for