Download - Copyright anbirts1 Max Wealth. copyright anbirts2 Funding How do we Capitalise the Company
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Max Wealth
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Variability
P & L
Seasonality
Cash Flow
Discount Rate
Cost of Capital
Equity/Debt
CM
Effect
FX
Liquidity
Payables/
Receivables
Better
Rated
Lower
CostTrade Credit
Tighter Ratios
copyright anbirts
Variability
P & L
Seasonality
Cash Flow
Discount Rate
Cost of Capital
Equity/Debt
CM
Effect
FX
Liquidity
Payables/
Receivables
Better
Rated
Lower
CostTrade Credit
Tighter Ratios
copyright anbirts
Variability
P & L
Seasonality
Cash Flow
Discount Rate
Cost of Capital
Equity/Debt
CM
Effect
FX
Liquidity
Payables/
Receivables
Better
Rated
Lower
CostTrade Credit
Tighter Ratios
copyright anbirts
Variability
P & L
Seasonality
Cash Flow
Discount Rate
Cost of Capital
Equity/Debt
CM
Effect
FX
Liquidity
Payables/
Receivables
Better
Rated
Lower
CostTrade Credit
Tighter Ratios
copyright anbirts
Variability
P & L
Seasonality
Cash Flow
Discount Rate
Cost of Capital
Equity/Debt
CM
Effect
FX
Liquidity
Payables/
Receivables
Better
Rated
Lower
CostTrade Credit
Tighter Ratios
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Funding
How do we Capitalise the Company
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Funding
• What are the main concerns when deciding how to raise Finance?
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Funding
• What are the main concerns when deciding how to raise Finance?
- Amount
- Currency
- Maturity Profile
- Fixed or Floating
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Funding
• Conservative approach would be to match assets with liabilities
• i.e. where is repayment coming from and over what period of time?
• So,
What is the funding for?
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Funding
• Broad divisions Equity / Debt Short / Medium / Long
• Sources Banks – Commercial / Investment Other financial institutions Group companies Other companies
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Funding
• Many ways to raise funds so need to think about what are the features of each funding method and do they fit what the company needs in creating its portfolio of debt/equity.
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Fundingequity
• Equity
- Ordinary shares / ‘A’ Shares
- Preference Shares
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EQUITY
• Par Value/ Market Value
• Nominal Value/ Share Premium
• Shareholder Rights
• Advantages of a Listing
- exit
- easier access to finance
- takeover
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Rights Issue
• Must be offered to existing shareholders first. Pre emption rights.
- usually offered at below market
- usually underwritten
Example
In issue already, 4 million 50 pence, par value, ordinary shares
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Rights Issue
Example
In issue already, 4 million, ordinary shares par value, 50 pence
market value 200 pence
need to raise GBP 1,500,000
issue one new share for every 4 held at 150 pence per share
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Rights IssueEffect on Balance Sheet
GBP 000’s Before Rights Issue After• Net A’s 5,000 +1,500 6,500• Called up Share Cap 50p OS 2,000 + 500 2,500 Share Prem - + 1,000 1,000
P&L 3,000 - 3,000 5,000 1,500 6,500
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Rights IssueEffect on Share Price
• 4,000,000 x GBP 2.00 = GBP8,000,000
• 1,000,000 x GBP 1.50 = GBP1,500,000
• 5,000,000 GBP9,500,000
= 1.90
BUT…………
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Rights Issue
• Effect on Price for shareholder holding 1,000 shares
Shares Value
Pre Rights 1,000 x 200p 2,000
Rights 250 x150p 375
1,250 2,375
GBP1.90
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Rights Issues
• Advantages relative to other forms
- Relatively cheap
- Straightforward
- Issue expenses low
- Procedures fairly simple
- Existing interest in the company shares
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Rights Issues
• Disadvantages
- Has to be sold at a discount
- Equity is still expensive!!
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EQUITY
• Disadvantages
- Costs
- Those demanding shareholders
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Fundingdebt
• Short Term
Overdraft
Money market advance
Acceptance financing
Forfaiting
Factoring
Commercial Paper
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Fundingdebt
• Short Term
Overdraft
Money market advance
Acceptance financing
Forfaiting
Factoring
Commercial Paper
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Fundingdebt
• Supplier credit versus bank debt
• Terms 1/10 net 30
• Cost of bank debt 5%
• Do we take the discount or let our supplier fund us?
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Fundingdebt
• What is the discount worth on a per annum basis? 1 x 365 x 100 = 18.43% pa 99 20 In amounts, assuming £100,000 payable Discount worth £1,000 Need to fund £99,000 for 20 days at 5% 99,000 x .05 x 20 = £271cost 365
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Fundingdebt
• Medium Medium term notes• Long Bonds - Straights (plain vanilla) - Floating - Discounted bonds - Equity features
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Fundingdebt
• Bonds Definition A Bond is a negotiable certificate that
evidences indebtedness. Bonds are also referred to as ‘notes’ or
‘debentures’ Can be Bearer or Registered Eurobond / Domestic Bond / Foreign Bond
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Funding debt
• Straight bond
Fixed rate
Fixed term
No special features
• Floating Rate
Interest rate is adjusted periodically
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Funding debt
• Discounted Bonds
Where bonds are sold below face value and part of the return comes as capital appreciation.
Zero coupon or Pure discount bond
i.e. ten year bond, face value $100,000 with 10% ‘interest rate’ would be sold for
$38,600
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Fundingdebt
Discounted bonds
• Advantages / disadvantages for issuer
- Issuer has no interest payment or lower interest payment
- Tax relief may be taken on accrued interest cost
- Very large capital repayment
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Fundingdebt
• Discounted bonds
• Advantages / disadvantages for the investor
- Low or no interest income
- But no or low tax!
- Certainty of return if held to maturity
- Capital gain not income tax
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Fundingdebt
Equity Features
• Convertibles
A Eurobond is convertible if in addition to making the usual coupon payments, the total may be exchanged for another type of asset.
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Fundingdebt
• Convertible – Why?
• Issuer advantages
- Interest payments reduced
- Tax relief on interest
- Attractive to investors
- May not have to repay
- Possible leverage benefits
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Funding debt
• Convertibles
• Issuer disadvantages
- Ultimate cost may be too much
- Dilution effects if conversion takes place
- Pre-emption rights
- Conversion may not take place
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Funding debt
• Convertibles• Investor advantages- Some income- Chance to make a capital gain- Indirect way to hold equity• Disadvantages- Lower interest- Convertible may be subordinated- May not make a capital gain
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Fundingdebt
• Equity features
• Warrants
Dated call options, convertible into equity or other bonds.
It is separate to the bond and can be traded separately
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Funding debt
• Warrant
• Investor advantages / disadvantages
- Can trade the bond and the warrant separately
- Conversion cannot be forced
- But low interest
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Fundingdebt
• Issuer advantages / disadvantages
- Low coupon
- Will receive some cash from new shares
- But dilution effects
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FundingTechnical Issues
• When considering the pricing of alternatives watch out for comparability
- Accruals basis- Discount versus interest at maturity- Compounding effect- Front end fees / commitment fees / other
fees- Back up lines
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FundingCriteria
• Flexibility
• Amount
• Tenor
• Trade-ability
• Name
• Currency
• Timing