APT TECHNICAL CPD - MAF FINANCING DECISION Sources of finance and - - PowerPoint PPT Presentation

APT TECHNICAL CPD - MAF

FINANCING DECISION

Sources of finance and the financing decision

Nicholas Riemer Nicholas.Riemer@firstrand.co.za

Agenda

• Workflow to understanding sources of finance and the

financing decision.

• What are the sources of finance available? Generic

Problem (theory)

• How to address the financing decision relating to the

industry at hand?

• What is the specific problem?
• How to incorporate into your file

Workflow Approach

Sources of finance

Generic problem

• Where does this fit in for APT/APC?
• Need to consider:

– Broad categories of finance – Mix of debt and equity – Specific sources of finance and types of financial instruments – Cost, risk, control and other implications

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The JSE

• Are we working with a listed entity? If so
• Types of securities?
• JSE Debt Market
• JSE Derivatives Market
• Main board vs ALTx
• Listing requirements
• Advantages and disadvantages of listing

– De-listing / taking a company private

• Methods of obtaining a listing
• All of the above Key if sources of finance triggered, and

the entity is listed.

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Financial institutions

• Financial services offered:

– Commercial banking – Investment banking (merchant banking):

• Corporate finance
• Project finance
• Lending
• Money-market

8

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BASIS FOR COMPARISON INVESTMENT BANK COMMERCIAL BANK Meaning Investment bank refers to a financial institution, that offers services like underwriting of securities, brokerage services and so on. Commercial bank is a bank that provides services like accepting deposits, lending money, payment on standing

• rder and many more.

Offers Customer specific service Standardized service Associated with Performance

• f

financial market. Nation's economic growth and demand for credit Customer base Few hundreds only Millions Banker to Individuals, government and corporations. All citizens Income Fees, commissions or profit

• n trading activities.

Fees and interest income

Financial institutions cont.

– Private equity and venture capital:

• Why?
• Required returns?
• What do private equity firms look for?
• Advantages / disadvantages?
• Difference?
• Special institutions:

– Industrial Development Corporation (“IDC”) – Public Investment Corporation (“PIC”) – National Empowerment Fund (“NEF”) and Khula Enterprise Finance – Business Partners – Small Enterprise Development Agency (“SEDA”)

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Financial institutions cont.

• Need to consider “life-stage” of entity
• E.g. Small entities / start ups:

– Majority of capital usually not from financial institutions / external investors – Usually owners invest personal savings, bank loans in their personal capacity, family and friends (loans or part ownership)

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Types of finance

• Equity – internal or external
• Debt – financial institutions or investors
• Hybrids

– Combination of debt and equity – E.g. preference shares, convertible instruments (e.g. convertible bonds)

• Foreign finance

– E.g. international listing of shares, international bond issue, international loans

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Equity-related instruments

• Usually primary source of finance
• Ordinary shares:

– Investors?

• Public vs private company
• New vs existing shareholders
• Retained earnings:

– Cost? – Benefit?

• Preference shares:

– Why? – Hybrid – Cumulative vs non-cumulative – Participating vs non-participating – Redeemable vs non-redeemable – Convertible vs non-convertible

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Debt-related instruments

• Two main types – bank loans and corporate debt
• General:

– Medium vs long-term – Fixed vs variable rate – Secured vs unsecured – Covenants – Credit ratings

• Debentures / corporate bonds / notes
• Long-term loans:

– Mortgage loans

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Debt-related instruments cont.

• Short-term debt:

– Liquidity management (as opposed to financing investments) – Working capital cycle – bridging finance – Includes creditors (raised ‘spontaneously’); bank overdraft; banker’s acceptance; bills and notes; asset based financing (i.e. against debtors and inventory); revolving credit facility

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Leases

• Leases

– Application:

• General (why lease)
• Asset specific finance decisions (discounted lease instalments)

– Advantages of leasing NB – Things to look out for include:

• Move to IFRS 16. Might be a finance trigger, in terms of using Leasing as

finance option but then how would one account for the transaction? What are the tax implications?

• Debt covenants. Have they changed ?

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Debt and equity compared

• Return:

– Leverage (positive gearing, increase the value of the company) – Tax implications (deductions debt) – Cost (Ke more expensive than debt)

• Risk:

– Commitment to debt – Capital repayment – Capital structure optimal debt equity ratio

• Control:

– Dilution (issue of additional shares) – Levels of control NB 75%, 50%, 35% etc – Covenants NB keep a look out for this

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Financing decision to the specific industry

Generic Considerations

• Must consider consequences, relative costs and benefits (including

tax implications) and implications for operational and future financing decisions

• Factors to consider include:

– Cost – Risk – Control – Availability – Market conditions – Impact on financial performance and financial position – Impact on credit rating (if applicable) – Cash flows (matching) – Structure of the entity

• NB – suitability for that specific entity and situation!

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Preparing a financing plan – considerations

• 1. Purpose of financing e.g.:

– Redemptions – Projects – Working capital

• 2. Period and pattern of financing

– Long/short-term – Pattern of cash flow – Try match period of finance with life-time of investment

• 3. Amount of financing

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Preparing a financing plan – considerations cont.

• 4. Different sources – discuss & consider the pro’s

and con’s of each

– General (i.e. main categories) from the company’s perspective in terms of:

• Risk – interest commitment, capital repayment, saturation (risk
• f financial distress), signaling effects
• Return – ongoing returns/leverage, tax implications, cost
• Control – dilution, restrictive covenants

– Debt-related instruments e.g.:

• Various terms and conditions - secured/ unsecured/

convertible/ redeemable/ fixed rate/ variable rate/balloon repayment/ residuals

• Debentures
• Mortgage bonds

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Preparing a financing plan – considerations cont.

• Loans
• Leases

– Hybrid instruments e.g.:

• Preference shares

– Fixed rate/ variable rate/ cumulative / non-cumulative/ redeemable/ non-redeemable/ convertible / participating

– Equity related instruments e.g.:

• Ordinary shares
• Retained earnings

– Consider availability, market conditions, availability of security etc.

• 5. Foreign finance?

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Preparing a financing plan – considerations cont.

• 6. Appropriate mix of instruments

– Dependent on the company’s current financial position

• Perform an analysis

– Target capital structure

• 7. Get specific i.e. where will the funds be raised?

– Look at the industry triggered as well as the entity at hand in determining what the ideal solution will be. – This is where the problem at hand can be solved. – Need to have a key idea as to the problem at hand and then involve all the theory above to address the problem at hand.

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Building a file for coverage

• My File.
• Theory in terms of the sources of finance

summarized in front of the file. NB

• Coverage, all questions asked of you labelled for the

trigger in the pre release

• A summarized sheet with the different finance

decisions available with adv and disadantages for both.

• Lastly all information used and researched behind

this for inclusion where needed.

• All the best!