copyright anbirts2 Funding How do we Capitalise the Company
copyright anbirts3 Funding What are the main concerns when deciding how to raise Finance?
copyright anbirts4 Funding What are the main concerns when deciding how to raise Finance? - Amount - Currency - Maturity Profile - Fixed or Floating
copyright anbirts5 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?
copyright anbirts6 Funding Broad divisions Equity / Debt Short / Medium / Long Sources Banks – Commercial / Investment Other financial institutions Group companies Other companies
copyright anbirts7 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.
copyright anbirts9 EQUITY Par Value/ Market Value Nominal Value/ Share Premium Shareholder Rights Advantages of a Listing - exit - easier access to finance - takeover
copyright anbirts10 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
copyright anbirts11 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
copyright anbirts12 Rights Issue Effect on Balance Sheet GBP 000s Before Rights Issue After Net As 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
copyright anbirts13 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…………
copyright anbirts14 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
copyright anbirts15 Rights Issues Advantages relative to other forms - Relatively cheap - Straightforward - Issue expenses low - Procedures fairly simple - Existing interest in the company shares
copyright anbirts16 Rights Issues Disadvantages - Has to be sold at a discount - Equity is still expensive!!
copyright anbirts18 Funding debt Short Term Overdraft Money market advance Acceptance financing Forfaiting Factoring Commercial Paper
copyright anbirts19 Funding debt Short Term Overdraft Money market advance Acceptance financing Forfaiting Factoring Commercial Paper
copyright anbirts20 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?
copyright anbirts21 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
copyright anbirts22 Funding debt Medium Medium term notes Long Bonds - Straights (plain vanilla) - Floating - Discounted bonds - Equity features
copyright anbirts23 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
copyright anbirts24 Funding debt Straight bond Fixed rate Fixed term No special features Floating Rate Interest rate is adjusted periodically
copyright anbirts25 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
copyright anbirts26 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
copyright anbirts27 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
copyright anbirts28 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.
copyright anbirts29 Funding debt Convertible – Why? Issuer advantages - Interest payments reduced - Tax relief on interest - Attractive to investors - May not have to repay - Possible leverage benefits
copyright anbirts30 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
copyright anbirts31 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
copyright anbirts32 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
copyright anbirts33 Funding debt Warrant Investor advantages / disadvantages -Can trade the bond and the warrant separately -Conversion cannot be forced -But low interest
copyright anbirts34 Funding debt Issuer advantages / disadvantages -Low coupon -Will receive some cash from new shares -But dilution effects
copyright anbirts35 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