Funding

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					                  Max Wealth

                                                     FX
                                          CM
                     Cash Flow                          FX
                                             CM Liquidity
                                        Effect
                         Cash Flow
                     Discount Rate                      Liquidity
                                             Effect Payables/
                          Discount Rate                 Payables/
                                                     Receivables
                 Cost of Capital                               Receivables
                                            Better       Tighter
                      Cost of Capital
                                            Rated Better Ratios
                                                              Tighter
Variability                                                   Ratios
     Variability                            Lower Rated
                 Equity/Debt
P&L                   Equity/Debt Cost Lower
     P&L                    Trade                 Cost
Seasonality             copyright anbirts
                            Credit   Trade
     Seasonality          copyright anbirts                                  1
                                copyright anbirts
                                     Credit
          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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                 Funding
                  equity
• 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 Issue
          Effect 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 Issue
         Effect 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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                 Funding
                   debt

• Short Term
  Overdraft
  Money market advance
  Acceptance financing
  Forfaiting
  Factoring
  Commercial Paper
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                 Funding
                   debt

• Short Term
  Overdraft
  Money market advance
  Acceptance financing
  Forfaiting
  Factoring
  Commercial Paper
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                   Funding
                     debt
•   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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                   Funding
                     debt
• 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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                     Funding
                       debt
• Medium
  Medium term notes
• Long
  Bonds
  - Straights (plain vanilla)
  - Floating
  - Discounted bonds
  - Equity features

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                Funding
                  debt
• 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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                 Funding
                   debt
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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                   Funding
                     debt
•   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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                 Funding
                   debt
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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                   Funding
                     debt
•   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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                 Funding
                   debt
• 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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                  Funding
                    debt
•   Issuer advantages / disadvantages
-   Low coupon
-   Will receive some cash from new shares
-   But dilution effects




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              Funding
           Technical 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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                    Funding
                    Criteria
•   Flexibility
•   Amount
•   Tenor
•   Trade-ability
•   Name
•   Currency
•   Timing
                     copyright anbirts   36

				
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posted:7/1/2012
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